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THE  HISTORY  OF  RAILROAD  TAXATION  IN  MICHIGAN 

A  thesis  submitted  to  the  Faculty  of  the  Department  of  Literature,  Science  and  Arts  of 
the  University  of  Michigan,  for  the  degree  of  Doctor  of  Philosophy. 


BY 

WILBUR  0.  HEDRICK, 

PROFESSOR  OF  HISTORY  AND  ECONOMICS  IN  THE  MICHIGAN  AGRICULTURAL  COLLEGE. 


LANSING,  MICHIGAN 

WYNKOOP    HALLENBECK   CRAWFORD    CO,,  STATE    PRINTERS 

1912 


div  to 


PREFACE. 

The  history  of  railroad  taxation  in  Michigan  was  prepared  by  Prof. 
W.  O.  Hedrick  of  the  Michigan  Agricultural  College,  upon  request  of  Dr. 
Henry  C.  Adams,  professor  of  Political  Economy  and  Finance  of  the 
University  of  Michigan. 

The  thesis  has  been  printed  by  the  Legislative  Reference  Department 
of  the  Michigan  State  Library,  hoping*  it  may  throw  light  upon  existing 
conditions  and  perhaps  assist  in  the  settlement  of  questions  involved  in 
the  taxation  of  the  railroads  of  Michigan. 

MARY  C.  SPENCER, 

State  Librarian. 


235322 


TABLE  OF  CONTEXTS. 


Page 

Preface 

Introduction ? 

CHAPTER  ONE. 

The  Capitalization  Tax 9 

I.     Railroad  Development  in  Michigan 

II.     General  Taxation 

III.     The  Beginnings  of  Railroad  Taxation 13 

CHAPTER  TWO. 

The  Tax  on  Gross  Income 

I.     The  " Municipal  Aid"  Movement 21 

II.     Administration  and  Characteristics  of  the  Tax 23 

1.  The  Basis  of  Taxation,  Definition  of  "Gross  Income,"  the  Term 

" Per  mile"  and  Localization  of  Income 23 

2.  The  Tax 26 

3.  Productivity  of  the  Tax 28 

4.  Problems  in  Administration 30 

III.     The  Public  Attitude  Toward  the  Tax 32 

CHAPTER  THREE. 

The  Property  Tax  on  Railroads 34 

I.     The  "Equal  Taxation"  Reform 34 

II.    The  Taxation  Law 39 

1.  Assessment  Provisions 39 

2.  The  Tax  Rate 41 

3.  The  Board  of  Assessors 44 

CHAPTER  FOUR. 

The  Operation  of  the  Property  Tax 45 

I.     The  Assessment  Process 45 

II.     Problems  of  the  Rate  and  of  Equalization ^ 50 

III.     Results  from  the  Tax 53 

CHAPTER  FIVE. 

The  Disposition  of  the  Tax :     Summary 57 

I.     State  Taxation  for  Local  Expenditure 57 

II.     Centralized  Administration 63 

III.     Merits  of  the  Property  Tax  on  Railroads 65 

Bibliography -  . 69 

Index 71 

2 


THE  HISTORY  OF  RAILROAD  TAXATION  IN 

MICHIGAN. 


INTRODUCTION. 

Almost  a  half  score  of  years  have  gone  by  since  the  extension  in  Michi- 
gan of  the  property  tax  to  railroads.  This  achievement  resulted  from 
a  controversy — known  as  the  "equal  taxation"  controversy — concerning 
the  merits  of  the  "property"  as  compared  with  the  "income"  methods  of 
railroad  taxation  which  left  little  unsaid  or  undone  that  would  show 
merit  or  defectiveness  in  either  of  these  systems.  The  people  of  the 
state  indeed  underwent  a  severe  educational  discipline  in  matters  per- 
taining to  railroad  taxation  and  the  taxing  law  which  was  enacted 
should  embody,  seemingly,  the  best  current  intelligence  with  regard  to 
this  kind  of  legislation. 

It  is  the  purpose  of  this  study  to  examine  the  nature  and  the  workings 
of  this  tax  and  also  the  purely  financial  aspects  of  the  reform  from  which 
the  new  measure  originated.  The  displaced  gross  income  tax  will  be 
discussed,  principally  because  it  affords  a  basis  for  comparisons,  and  a 
still  earlier  tax — the  one  on  securities — will  also  be  noticed  in  order  to 
show  the  beginnings  of  some  administrative  methods  which  have  been 
successively  applied  to  all  the  taxing  systems  that  have  been  employed 
by  the  state.  Finally  a  critical  examination  will  be  made  into  the  pecu- 
liar disposition  of  railroad  taxes  which  has  always  prevailed  in  this 
commonwealth. 


CHAPTER  ONE. 

THE  CAPITALIZATION  TAX. 

I.     RAILROAD  DEVELOPMENT  IN  MICHIGAN. 

The  familiar  grouping  of  railroads  in  Michigan  into  two  classes — one 
known  as  the  "charter  roads/'  and  the  other  as  the  "general  law  roads" 
—has  embarrassed  the  State  with  a  dual  system  of  railroad  taxation 
from  the  beginning. 

The  "charter  roads"  owe  their  origin  to  an  early  State  constitution 
which  forbade  incorporation  by  other  than  special  acts  of  the  legislature. 
More  than  forty  charters  were  granted  to  railroad  companies  under  the 
provisions  of  this  constitution  but  of  these  all  save  five  proved  sterile 
so  far  as  the  development  of  their  franchises  is  concerned.  A  further 
distinction  of  this  small  group  of  survivors  is  that  they  were  the  bene- 
ficiaries of  the  internal  improvement  movement  in  Michigan — all  of  them 
indeed  with  the  exception  of  one,  having  been  built  or  promoted  by  the 
State. 

The  history  of  internal  improvements  in  Michigan  has  had  many  nar- 
rators and  needs  but  a  condensed  statement  here.*1  In  brief,  an  internal 
Improvement  commission,  appointed  in  1837,  the  first  year  of  statehood,*2 
undertook  the  construction  of  three  railroads  across  the  state — named, 
in  order,  the  Northern,  the  Central,  and  the  Southern.  Little  or  no 
actual  accomplishment  ensued  upon  the  Northern  route,  the  Central  was 
more  than  half  built,  and  the  Southern  more  than  a  third. 

This  activity  of  the  state  was  in  full  harmony  with  the  controlling 
spirit  in  neighboring  states  at  this  time.  It  apparently  had  become  settled 
that  improvements  of  this  sort  were  not  to  come  from  the  general  govern- 
ment and,  individual  initiative  being  doubted,  state  governments  every- 
where undertook  the  building  of  highways,  canals  and  railroads.  A 
further  incitement  to  such  enterprise  in  Michigan  arose  from  the  "boom" 
which  the  state  was  undergoing.  More  land  was  bought  and  sold  in 
Michigan  in  a  single  year  (1836)  than  during  its  whole  previous  his- 
tory.*3 The  number  of  inhabitants  had  increased  in  three  years  (1834 
to  1837)  from  87,278  to  174,575.**  The  share,  too,  of  the  Federal  surplus 
distribution  due  to  the  State  arrived  on  the  very  eve  of  commencing  these 
improvements  and  helped  to  stimulate  the  movement. 

But  on  the  other  hand  the  failure  of  this  internal  improvement  policy 
was  scarcely  doubtful  from  the  first.  The  widespread  financial  panic  of 
1837  antedated  by  only  a  year  the  actual  beginnings  of  railroad  building 

*1See  Miss  Keith's  "An  Historical  Sketch  of  Internal  Improvements  in  Michigan.  Mich. 
Pol.  Sci.  Pub.  Vol.  IV. 

*2Mich.   Statutes,   1837,   p.   193. 

*3Adams'   R.,    "Agriculture   in   Mich."      Mich.    Pol.    Sci.    Pub.   Vol.   III. 

*4Judge   Cooley,   "History   of  Michigan,"   p.   255. 


10  MICHIGAN   STATE  LIBRARY. 


by  the  State.  '.The  credit  of 'the  State  was  the  resource  relied  upon  to 
supply  the  funds  for  these  improvements,  but  the  misplacing  of  the  first 
loan  of  five  millions  of  dollars,  whereby  more  than  half  was  lost,  and 
the  hesitancy  of  the  state  in  acknowledging  responsibility  for  these  "lost 
millions"  forestalled  the  further  use  of  credit.  Inexperience  with  every 
detail  of  railroad  economy  took  a  heavy  toll  from  the  builders — such, 
for  instance,  as  the  early  use  of  "strap  rails"  which  soon  required  re- 
placement at  large  expense.  Sectional  controversies  over  locating  the 
improvements  and  construction  scandals — familiarly  known  more  re- 
cently as  "graft" — caused  legislative  inquiries  and  brought  disrepute 
upon  the  enterprise. 

It  was  the  exhaustion  of  funds  and  credit,  however,  which  brought 
an  end  to  the  undertaking.  By  1845  no  means  remained  except  taxation, 
and  the  interest  charges  alone  upon  the  debt  already  contracted  exceeded 
by  three  times  the  income  which  had  thus  far  been  received  by  taxation 
during  any  one  year  from  the  people  of  the  state.*5  It  was  well  known 
that  taxation  for  further  construction  of  roads  would  meet  with  resist- 
ance and  the  opportunity  having  arisen  in  1846  for  the  sale  of  the  Central 
and  the  Southern  both  were  in  that  year  disposed  of  to  chartered  com- 
panies which  were  designated  by  the  names  which  the  roads  had  pre- 
viously borne. 

The  roads  with  the  special  charters  have  easily  maintained  leadership 
among  their  kind  in  the  state — the  advantages  of  an  "early  start"  having 
worked  incalculably  toward  this  end.  They  were  without  rivals  during 
the  first  decade  after  their  sale  by  the  state,  for  ten  years  longer  they 
exceeded  in  mileage  the  united  mileage  of  the  remainder  of  the  roads 
in  the  state  and  their  traffic  earnings  until  1880  surpassed  the  aggregate 
earnings  of  all  of  the  other  roads  taken  together. 

The  "general  law  roads"  owe  their  name  to  a  general  law  for  incor- 
porating railroads,  enacted  in  1855,  since  the  second  constitution  which 
the  state  adopted  proscribed  special  acts  of  incorporation  except  in  the 
cases  where  incorporation  was  desired  for  public  purposes.  The  roads 
of  this  group,  which  now  exceed  in  number  and  mileage  the  number  and 
mileage  of  the  one  time  "charter  roads,"  were  given  their  first  great 
impetus  by  the  land  grants  from  the  Federal  government.  These  grants, 
of  which  two  or  three  of  the  long  north  and  south  roads  were  the  chief 
beneficiaries,  consisted  chiefly  of  heavily  timbered  pine  lands  and  were 
repeatedly  renewed  and  enlarged.  Indeed,  the  land  grant  history  com- 
piled in  1880  and  published  by  the  46th  Congress  shows  that  three  states 
only  of  those  which  were  beneficiaries  of  this  policy  were  the  recipients 
of  larger  amounts  of  this  land  than  was  Michigan.*6 

The  building  of  roads  of  this  class  was  given  a  second  stimulus  when 
in  the  late  sixties  there  was  a  partial  relapse  of  the  people  of  the  state 
into  the  road-building-at-public-expense  mania  of  the  internal  improve- 
ment period.  This  new  manifestation,  through  making  use  of  the 
municipalities  in  securing  the  funds  for  road  construction,  became  known 
as  the  "municipal  aid"  movement  and  a  measure  of  its  intensity  is  found 
in  the  fact  that  the  railroad  mileage  of  the  state  during  the  seven  years 

*5This  is  clearly  set  forth  in  the  official  documents  of  1836.  The  governor's  message 
1§46,  p.  22  shows  tax  receipts  of  $72,305.23  for  the  preceding  year.  The  Auditor's  Report 
1846,  p.  6  shows  interest  charges  of  $240,000  annually  due  from  the  state 

*6Executive  Doc.  47  Part  IV  Forty-sixth  Congress,  3rd  session,  Chap.  20.  See  too 
Rmgwalt's  "Transportation  Systems,"  p.  226. 


RAILROAD    TAXATION   IN   MICHIGAN.  11 

prior  to  1870,  under  the  stimulus  of  this  movement,  was  increased  by  975 
miles,  over  which  not  less  than  sixty-five  new  companies  exercised  pro- 
prietorship.*7 

Once  again  in  a  later  instance  simple  commercial  forces  were  deemed 
insufficient  to  furnish  the  state  with  adequate  traffic  facilities.  In  1891 
a  law  was  enacted  which  exempted  from  taxation  all  roads  which  should 
be  built  in  the  upper  peninsula  and  in  the  northern  part  of  the  lower.*8 
This  familiar  device  for  promoting  railroad  construction  had  been 
hitherto  frequently  used  in  the  state  as  an  encouragement  to  particular 
lines  and  now,  when  given  more  general  application,  proved  immediately 
effective  though  it  was  unable  to  weather  unrepealed  the  anti-railroad 
feeling  which  the  equal  taxation  reform  a  few  years  later  engendered. 

The  growth  in  mileage  of  the  "general  law"  roads  and  of  business  im- 
portance on  the  part  of  the  "charter"  lines  brought  out  plainly  in  the 
early  eighties  the  undesirability  of  continuing  longer  the  especial  privi- 
leges and  exemptions — particularly  taxation  exemptions — which  distin- 
guished these  two  kinds  of  properties  and  steps  were  taken  at  this  time  to 
abridge  or  amend  the  charters.  The  Lake  Shore  and  Michigan  Southern 
was  the  company  selected  for  attack  and  in  1877  a  joint  resolution  by  the 
legislature  directed  the  railroad  commissioner  "to  provide  for  the  collec- 
tion of  any  specific  taxes  due  from  this  line"  even  if  litigation  must  be 
employed.*9  The  following  year  a  suit  was  commenced  as  a  result  of 
this  resolution,  the  state  contending  that  the  company  was  the  result  of 
a  consolidation  between  a  Michigan  company  and  an  outside  company 
under  the  general  railroad  law  of  the  state  and  therefore  was  amenable 
to  the  taxing  provisions  of  this  law.*10  The  case  was  tried  before  the 
supreme  court  and  a  decision  adverse  to  the  government  was  rendered. 
A  similar  charge  was  made  against  the  Detroit,  Grand  Haven  and  Mil- 
waukee by  a  senate  committee  in  1883,*11  and  the  suit  which  followed 
before  the  supreme  court  for  the  dissolution  of  the  charter  of  this  road 
proved  also  unavailing  to  the  state.*12  Once  again  the  legitimizing  contro- 
versies of  this  last  road  were  re-experienced.  This  was  in  1905-6  when 
the  validity  of  its  early  charter  was  again  declared — in  this  instance  by 
both  the  West  Michigan  Federal  court  and  also  by  the  United.  States 
supreme  court.*13 

In  the  "equal  taxation"  agitation  of  the  late  nineties  but  little  less 
stress  was  laid  upon  the  desirability  of  repealing  these  charters  than  was 
laid  upon  the  enactment  of  the  new  taxing  law  itself  since  such  a  law 
would  produce  grave  inequalities  if  these  chartered  roads  were  to  be 
exempt  from  its  action.  The  charters  themselves,  it  was  found,  furnished 
a  means  for  their  own  extinction  through  the  provision  which  each  con- 
tained, save  that  of  the  Detroit,  Grand  Haven  and  Milwaukee,  that  after 
thirty  years  the  state  might  "alter,  repeal  or  amend  the  same,"  "provided 
that  said  company  shall  be  compensated  for  all  damages  sustained  by 
reason  of  such  alteration,  amendment  or  repeal."*1*  Under  this  provi- 
sion and  following  the  advice  of  a  special  commission  consisting  of  the 

*7See    statutes    1863,    '65,    '67,    '69   for     names    of     companies.      Auditor's    Rep.    1870   for 
mileage. 

*8Statutes  1891,  p.   218. 

*9Joint    Res.    No.    17    Statutes    1877. 

*10State  Treas.  vs.  Auditor  Gen'l  46  Mich.  Rep.,  p.  224. 

*nSen.    Jour.    1883,    p.    808. 

*12Att'y  Gen'l  vs.  Joy,  55  Mich.   Rep.  p.  94. 

*13Mich.   Tax  cases  201   U.   S.   Rep.   p.   293. 

*14Sec.   39   of   Mich.    Central    Charter    (1846). 


12  MICHIGAN   STATE  LIBRARY. 

railroad  commissioner,  state  treasurer  and  secretary  of  state  a  special 
session  of  the  legislature  in  1900  rescinded  the  charters  and  arranged 
by  permissive  legislation  for  the  litigation  which  should  settle  the  amount 
of  damages  for  which  compensation  should  be  awarded. 

The  state  has  pursued  a  singularly  favorable  policy  towards  the  rail- 
roads. Not  only  have  these  properties  enjoyed  the  specific  gratuities 
which  have  been  mentioned — state  construction  and  aid,  land  grants, 
municipal  aid,  tax  exemptions,  etc. — but  they  have  had  wide  freedom 
from  public  regulation.  At  the  time  when  the  adjoining  states,  under 
the  influence  of  the  "Granger  movement,"  were  reducing  traffic  rates  to 
the  limits  of  railroad  endurance,  Michigan  remained  satisfied  with  the 
mere  assertion  of  regulative  power  expressed  through  an  amendment  to 
the  state  constitution.*15  Freight  rates  have  indeed  at  all  times  until 
recently,  been  free  from  public  regulation  in  this  state  and  the  case  has 
not  been  much  otherwise  with  passenger  fares.*16  The  supervisory  legis- 
lation, too,  which  the  state  has  enacted  from  time  to  time  has  been 
invariably  of  the  strictly  customary  type  in  its  requirements  of  accident 
precautions,  reports  and  other  details  which  these  laws  involve. 

II.     GENERAL  TAXATION. 

The  resource  from  which  the  expenses  of  the  state  government  in  Michi- 
gan have  been  defrayed  in  the  past  have  been  in  the  main  an  apportioned 
general  property  tax.  This  exaction  itself  has  remained  fairly  uniform 
throughout  the  history  of  the  state.  Prior  to  1850  it  was  a  rated  tax  and 
seldom  exceeded  in  amount  one  and  one-half  or  two  per  cent  as  annually 
provided  by  statute.  In  the  period  which  followed  the  civil  war  the 
expenses  of  government  seem  to  have  increased  since  an  elaborate  and 
careful  computation  made  by  Auditor  Humphrey  in  1870  shows  a  tax 
of  two  and  one-half  per  cent  for  the  year  1869*17  and  in  recent  years  as 
reported  by  the  Board  of  State  Tax  Commissioners  an  impost  approximat- 
ing two  per  cent  has  been  found  necessary. 

The  annual  assessments  of  property  upon  which  this  tax  is  levied  have 
also  shown  a  fairly  stable  rate  of  increase.  In  1853  when  the  State  Board 
of  Equalization  was  established,  the  taxable  property  of  the  state  was 
in  one  year  increased  from  a  few  millions  of  dollars  to  one  hundred  and 
twenty  millions,  but  from  this  date  onward  the  growth  in  largeness  has 
been  almost  uninterrupted,  measuring  slightly  more  than  a  billion  and 
a  half  at  the  time  of  the  last  assessment.*18 

In  addition  to  this  chief  source  of  revenue,  Michigan  has  always  had 
many  various  fees  and  taxes.  These  have  secured  more  prominence  than 
is  usually  given  to  such  imposts  in  other  states  through  being  grouped 
together  under  the  name  of  "specific  taxes,"  though  this  name  has  been 
used  with  little  scientific  precision,  unfortunately,  since  levies  so  widely 
dissimilar  as  dog  taxes  and  fees  from  incorporations  have  been  classed 
together  as  specific  taxes.  Variation  from  the  common  general  property 
type  of  tax  alone  would  secure  apparently  until  recently  for  an  im- 
post the  name  of  specific  tax.*19 

*15Art.    XIX   "A"    Mich.    Constitution. 

*18See   Act   No.   202   Statutes  of   1889. 

*17Aud.  Rep.   1870,  p.  54. 

*18The  Aud.  Rep.  for  1896,  p.  309-10  gives  the  assessed  and  equalized  valuations  of 
property  in  this  state  from  1836-1891. 

*19In  1899  in  the  case  Pingree  vs.  Aud.  Gen'l,  the  term  specific  tax  received  a  definition 
from  the  Supreme  Court  which  has  had  the  effect  of  improving  the  classification  of  taxes 
in  the  Public  Reports  and  other  documents  of  the  state. 


RAILROAD    TAXATION   IN  MICHIGAN.  13 

Besides  grouping  these  miscellaneous  taxes  in  this  unusual  way  the 
state  early  in  its  history  began  the  practice  of  using  the  proceeds  from 
the  specific  taxes  for  the  support  of  the  public  schools.  The  conclusion 
seems  justifiable  that  it  is  this  especial  use  to  which  these  taxes  have  been 
put  which  has  stamped  the  name  into  our  fiscal  system  rather  than  that 
an  especial  partiality  has  been  developed  for  the  specific  as  compared  with 
the  ad  valorem  levy.  The  history  of  these  taxes  shows  at  any  rate,  that 
immediately  upon  the  development  of  suitable  methods  of  assessment 
and  collection  specific  taxes  have  been  invariably  discarded  and  their 
places  have  been  supplanted  by  the  general  property  tax.*2 

The  early  use  of  these  taxes  in  Michigan  originated  through  the  neces- 
sity which  the  territorial  government  labored  under  of  securing  its 
revenue  from  tavern-keepers,  ferry-keepers  and  merchants  "because  mer- 
chants and  ferry  and  tavern-keepers  were  practically  the  only  people 
who  had  ready  money  with  which  to  pay  taxes."*21  But  it  is  as  a  levy 
upon  unusual  taxables  that  these  exactions  have  had  their  greatest  use 
and  here  especially  the  individual  character  of  the  specific  tax  has 
rendered  it  serviceable,  since  to  extraordinary  properties  the  ad  valorem 
requirements  of  the  general  property  tax  are  frequently  hard  to  apply. 

Among  these  taxables,  with  pronounced  individual  variation,  which 
have  been  imposed  with  a  specific  tax  in  Michigan,  such  as  banks,  in- 
heritances, mines,  and  insurance  and  express  companies,  railroads  have 
been  easily  the  foremost  and  the  recent  transfer  of  these  great  proper- 
ties to  the  lists  of  the  general  property  tax  has  depleted  the  term  "specific 
tax"  in  its  practical  aspects  of  nearly  its  whole  significance  and  the 
famous  localism  seems  now  threatened  with  entire  disuse. 

III.     THE  BEGINNINGS  OF  RAILROAD  TAXATION. 

The  earliest  taxation  of  railroads  in  Michigan  resulted  from  the  sale 
of  the  state  built  roads  to  private  companies — none  of  the  earlier  charters 
indeed  (a  score  or  more)  having  had  any  suggestion  of  taxation  among 
their  provisions.  In  the  charters  of  the  road  purchasing  companies  it 
is  provided  that 

"the  said  companies  shall  pay  to  the  state  an  annual  tax  of  one-half 
of  one  per  cent  upon  the  capital  stock  paid  in — until  the  first  day 
of  February.  1851,  and  thereafter  an  annual  tax  of  three-fourths 
of  one  per  cent  upon  the  capital  stock  paid  in — and  also  upon  all 
loans  paid  to  said  company  for  the  purpose  of  constructing  said 
roads.*22 

The  tax  was  to  be  paid  to  the  state  treasurer  and  the  taxation  of  the 
roads  as  units  was  further  insured  by  the  terms  of  the  exempting  clause 
"and  the  property  and  effects  of  said  company,  whether  personal,  real 
or  mixed,  shall,  in  consideration  thereof,  be  exempt  from  all  and  every 
other  tax." 

The  new  tax  immediately  became  the  general  law  tax*23  too — barring 

*20Banks,  street  car  companies,  mining  companies  and  many  others  illustrate  this  fact. 
"Taxation  by  an  assessed  valuation  of  the  property  must  be  the  rule,  specific  taxation  the 
exception,  seems  an  unavoidable  conclusion,"  says  Justice  Campbell  in  summing  up  the 
relations  between  the  two  systems.  Wolcott  vs.  People.  17  Mich.,  p.  60. 

*21Schaffner  Terr.   Tax.    Leg.    in   Mich.   p.    27. 

'-Michigan   Central    Charter,    Statutes   1846.   p.    61. 

*23The  same  legislature  which  sold  the  roads  also  adopted  the  revised  statutes  in  1846. 
Apparently  the  terms  of  the  charter  provisions  regarding  taxation  of  railroads  were  simply 
adopted  into  the  revised  statutes.  Revised  statutes,  1846,  p.  14. 

3 


14  MICHIGAN   STATE   LIBRARY. 

the  part  which  applied  to  bonds — and,  since  its  employment  here  was 
meagre  owing  to  the  sparseness  in  number  of  the  roads  subject  to  a  gen- 
eral law  tax,*24  i.  e.,  companies  organized  under  the  general  railroad  law 
of  1855,  its  application  to  these  roads  may  well  be  disposed  of  at  this 
point.  None  of  the  roads  of  this  sort,  indeed,  had  attained  much  size 
before  the  expiration  of  the  tax  and  the  statutory  restriction  of  the 
impost  to  capital  stock  alone  and  to  only  paid  in  capital  stock  and  to 
that  only  which  represented  "the  proportions  of  the  road  actually  con- 
structed" caused  the  proceeds  from  this  capitalization  tax,  as  applied  to 
general  law  roads,  to  represent  an  almost  insignificant  amount. 

The  rate  of  taxation  upon  these  roads  was  increased  in  1861  to  one  per 
cent*25  and  in  1869  the  base  of  the  levy  was  enormously  enlarged.  The 
legislature  of  this  latter  year  had  succeeded  in  passing  a  general  law  by 
which  municipalities  might  freely  vote  "aid"  in  the  building  of  railroads 
and,  largely,  as  a  sop,  seemingly,  to  the  important  elements  in  the  state 
which  had  opposed  the  "aid"  legislation,  it  enacted  a  new  taxing  law 
which  imposed  the  one  per  cent  rate 

"upon  the  capital  stock  paid  in  and  upon  all  sums  of  money,  whether 
arising  from  net  proceeds  of  such  roads,  from  municipal  aid,  from 
sale  of  land  or  from  other  resources  which  shall  from  time  to  time 
be  invested  in  original  construction  or  stocking  or  any  new  con- 
struction or  stocking."*26 

An  assault  like  this  upon  all  the  sources  of  railroad  capitalization  at 
once  could  scarcely  fail  in  productiveness  and  the  tax  contributions  from 
the  general  law  roads  the  year  following  the  enactment  of  this  law  were 
approximately  three  fold  greater  than  the  highest  payment  of  any  pre- 
ceding year.*27  But  the  measure  was  of  short  duration  since  the  legisla- 
ture which  followed  the  one  of  1869  not  only  repealed  the  taxing  statute 
but  also  voted  the  return  to  the  companies  of  the  surplusages  over  the 
usual  payments  which  hitherto  had  been  contributed.*28 

It  is  consequently  with  the  charter  roads,  therefore,  that  the  capital- 
ization tax  has  had  its  chief  use  in  Michigan  and  the  relations  between 
this  impost  and  these  roads  remained  almost  unchanged  for  half  a  cen- 
tury. 

The  nature  of  the  obligation  to  the  state  assumed  by  the  companies 
with  regard  to  the  use  of  securities  for  the  basis  of  taxation,  and  the 
choice  of  "three-fourths  per  cent"  as  the  rate  of  payment  resulted  wholly 
from  bargaining.  Although,  too,  the  character  of  these  dues  was  a 
pivotal  question  in  the  sale  of  the  roads  to  both  the  state  and  the  com- 
panies*29 no  explanation  regarding  the  agreement  between  these  two 
parties  on  tax  details  can  any  where  be  found.  The  authority  to  which 

*24A  computation  in  the  State  Auditor's  report  for  1871  (page  27)  shows  a  return  r»f 
$48,849.42  in  taxes  from  the  general  law  roads  for  the  preceding  year.  But  since  these 
were  payments  made  under  the  all  embi'acing  statute  of  1869  and  much  of  it  was  paid  back 
to  the  roads  this  amount  is  in  excess  of  what  may  be  considered  legitimate  tax  receipts. 
There  seems  to  have  been  this  year  forty-three  general  law  companies  and  1,000  miles  of 
road. 

*25Statutes  of  1861,   p.   126-7. 

*26Statutes   of   1869,   p.    262. 

*2TThe  tax  due  from  railroads  in  1869  equalled  $176,487.70  ;  in  1870  the  amount  due  was 
$471,630.71.— Aud.  Rep.  1869,  p.  56;  1870,  p.  71. 

*28Statutes   1871.      Act   106. 

*29Many  years  after  the  sale  of  the  road  the  representative  of  the  companies  in  conduct- 
ing the  bargaining — Mr.  James  Joy — asserted  "the  Central  could  not  have  been  sold  by  the 
state  had  it  not  made  its  scheme  of  railroad  taxation  exactly  what  it  did.  See  Detroit  Free 
Press,  April  17,  1891. 


RAILROAD    TAXATION    IN   MICHIGAN.  15 

the  roads  should  be  amenable  in  their  payment  of  taxes  seems,  indeed, 
to  have  provoked  more  comment  in  the  legislative  committee  "on  sales'7 
than  did  the  railroad  attribute  which  should  be  taxed  and  the  assign- 
ment of  these  properties  to  the  state  exclusively  for  taxation  is  explained 
in  the  report  of  this  committee  as  follows — "since  the  expenditures  upon 
the  roads  had  been  from  the  state  treasury  it  was  deemed  but  just  that 
the  proceeds  of  the  tax  should  accrue  exclusively  to  the  state."*30 

This  custom  here  commenced  of  making  the  tax  a  state  tax  rather  than 
a  local  one,  though  brought  about  by  circumstances  rather  than  through 
the  wise  foresight  of  government,  was  destined  to  a  greater  productive- 
ness of  vital  results  than  was  any  other  feature  of  the  law.  The  free  hand 
which  the  state  government  has  always  had  in  Michigan  in  modifying 
its  methods  of  taxing  railroads  because  there  were  no  local  interests  to 
be  considered,  the  specialization  of  the  receipts  to  the  support  of  schools 
and  the  administratively  superlative  centralized  management  of  the  tax 
are  the  important  issues  from  this  arrangement  which  are  most  easily 
noted. 

It  was  clearly  the  plan  of  the  authors1  of  this  system  that  their  tax 
should  be  a  levy  upon  the  value  of  the  roads  as  measured  by  their  costs 
of  construction.  This  is  the  distinct  inference  from  the  taxing  statutes 
themselves  and  is  also  the  judgment  of  contemporary  authorities.  In  the 
charter,  for  instance,  in  which  the  tax  is  originally  found  the  provision 
occurs  that  the  impost  shall  be  upon  the  stocks  and  bonds  and  also  upon 
the  "purchase  moneys"  which  the  companies  paid  to  the  state  for  the 
roads.  In  the  last  alteration,  also,  which  the  tax  underwent — the  law 
of  1869 — it  will  be  noticed  that  not  only  was  the  levy  to  be  made  upon 
the  securities  of  the  companies  but  it  was  also  to  be  made  "upon  all 
sums  of  money  which  shall  enter  into  the  construction  or  stocking  of 
the  roads."3  The  tax  was  frequently  passed  upon  by  the  supreme  court, 
and,  on  one  of  these  occasions  Judge  Campbell  explained  its  nature  by  the 
assertion  "it  was  never  designed  that  it"  (the  tax)  "should  be  lessened  by 
any  disaster  any  more  than  that  it  should  be  increased  by  any  amount  of 
prosperity.'7*  When  read  with  the  context,  the  implication  made  here 
is  plainly  an  assertion  of  the  belief  that  the  tax  has  been  fixed  by  con- 
struction costs  and  was  not  afterwards  subject  to  change.  Even  more 
plainly  in  the  same  case  Justice  Manning  declared  "it  is  a  tax  on  what 
the  construction  of  the  road  should  cost  the  company."*32 

The  imperfections  of  such  a  taxing  method  are  easily  discovered.  The 
value  of  a  railroad  is  very  incompletely  measured  at  best  by  the  outlay 
necessary  for  its  existence.  An  authority  on  railroad  valuations  has 
recently  said  "it  would  be  nearer  the  truth  to  say  that  costs  of  railway 
properties  have  nothing  to  do  with  their  values  than  to  assert  that  the 
values  of  railroad  properties  are  identical  with  their  costs."*33  But,  even 
had  costs  of  construction  proven  an  adequate  measure  of  values,  which 
in  the  case  of  new  roads  might  not  have  been  wholly  suppositional, 
the  defectiveness  of  this  tax  was  confirmed  by  the  use"  of  securities  at 
their  par  value  as  the  means  of  measuring  costs. 

The  period,  for  example,  during  which  the  capitalization  tax  was  most 
widely  employed  in  Michigan  was  the  period  of  "public  aid"  in  road 

*30Sen.  &  H.  Doc.  1846,  No.  2,  p.  6. 

*3iStatutes    1869,    p.    262. 

>32Mich.    Rep.    Vol.    5,   p.   452   and   459. 

*33Dr.  B.  H.  Meyer,  Bull.  U.  S.  Dep.  Labor  and  Commerce,  No.  21,  p.  17. 


16  MICHIGAN   STATE  LIBRARY. 

building.  Private  capital  was  nowhere — except  in  certain  special  in- 
stances— willing  to  take  the  risks  nor  in  sufficient  amounts  to  furnish 
the  sinews  for  adequate  extensions  of  these  great  utilities.  Under  these 
circumstances,  "land  grants,"  subsidies  voted  by  municipalities,  and 
public  and  individual  gifts  are  found  everywhere  among  the  resources 
of  road  construction  which  the  railroad  companies  employed  and  none 
of  these  would  necessarily  affect  the  number  of  shares  of  stock,  i.  e., 
the  base  upon  which  the  capitalization  tax  was  levied.  An  exact  rep- 
resentation of  the  proportions  of  the  resources  which  had  entered  into 
the  general  law  roads  prior  to  1870  may  indeed  be  compiled  from  the 
road  reports  of  this  year  and  the  discrepancies  in  the  capitalization 
method  of  measuring  costs  are  at  once  plainly  apparent.  The  compila- 
tion is  as  follows  and  shows  the  amounts  invested  in  the  construction 
and  stocking  of  roads  opened  for  use  prior  to  1870  :*34 

Capital  stock  .  , $9,127,067  46 

Earnings  of  roads 2,457,471  88 

Municipal  aid . .  378,550  00 

Proceeds  of  sales  of  lands 168,883  26 

Loans  12,807,571  67 

From  other  sources 816,795  12 

The  tax  on  stocks  and  bonds  valued  at  par  is  apparently  the  simplest 
of  methods  by  which  a  government  may  collect  revenues  from  corpora- 
tions. The  administration  of  such  a  tax  to  be  successful  requires  only 
the  enumeration  of  the  securities  and  the  imposition  upon  each  of  the 
taxing  rate.  A  method  of  such  simplicity,  too,  must  have  been  one  of 
especial  satisfactoriness  to  an  undeveloped  state  government  which  had 
undertaken  to  tax  railroads  as  entireties  though  no  suitable  administra- 
tive machinery  for  this  purpose  had  been  at  this  time  any  where  de- 
veloped. Some  difficulties  were  experienced  with  the  law,  however,  from 
the  first.  These  resulted  from  the  statutory  provisions  that  the  stock 
must  be  "paid  up"  and  that  loans  must  be  those  "used  in  construction^" 
and  these  hindrances  were  added  to  when  later  the  issues  of  stocks  were 
no  longer  kept  within  strict  investmental  limits  but  became  speculative 
and  when  bonds  came  to  assume  many  forms. 

The  new  company,  for  example,  which  purchased  the  Southern  in  1849 
issued  several  kinds  of  bonds,  also  common  stock,  bonus  stock,  and  later, 
stock  dividends.  The  dispute  between  the  state  and  the  road  as  to  which 
of  these  were  amenable  to  taxation  lasted  fully  twenty-five  years  and 
was  passed  upon  several  times  by  the  supreme  court.  Briefly  summar- 
ized the  decisions  of  the  court  were  as  follows :  First,  that  stocks  issued 
as  dividends  and  as  bonuses  should  be  considered  "paid  up;"  second, 
bonds  which  had  been  dishonestly  disposed  of  so  that  nothing  was  re- 
ceived by  the  company,  were  twice  held  to  be  taxable,  but  upon  the  final 
decision  a  reversal  prevailed ;  third,  loans  unwisely  used — in  one  instance 
in  the  building  of  a  ship  whick  was  lost  and,  in  another,  the  making  of 
a  loan,  which  was  never  repaid,  to  a  neighboring  road — were  declared 
subject  to  taxation.*35  Against  both  of  these  last  two  decisions  dissent- 
ing opinions  were  filed  showing  discord  among  the  jurists  as  to  the 
components  of  capital  stock  "paid  up"  and  "bonds  used  in  construction." 

*34Report  of  Railroad  Corporations,  And.  Rep.,  1870,  p.  XIV  and  XV. 

*354  Mich.  Rep.  (1856),  p.  398;  9  Mich.  Rep.   (1862),  p.  448;  46  Mich.  Rep.  (1881),  p.  193. 


RAILROAD    TAXATION    IN   MICHIGAN.  17 

Conflicting  interpretations  of  this  sort  and  the  reversal  of  the  first  settle- 
ment by  subsequent  decisions  discovers  the  practical  difficulties  of  assess- 
ing taxable  securities,  at  least,  as  conditioned  by  the  Michigan  statute, 
and  removes  "simplicity"  from  among  the  assured  attributes  of  this  tax. 

The  localization  of  the  taxable  securities  which  were  amenable  to  the 
state  in  the  case  of  interstate  roads  was  another  problem  which  quickly 
proved  troublesome.  Michigan  had  maintained  a  peculiar  attitude  of 
insularity  with  regard  to  railroads  during  the  first  two  or  three  decades 
of  their  existence.  The  early  publicly  owned  roads  had  been  located  to 
a  large  extent  in  the  interests  of  particular  localities,  and,  further  than 
serving  to  connect  one  great  lake  with  another,  had  completely  ignored 
natural  trade  routes.  But  the  interests  of  the  public  in  the  respect  of 
having  railroad  accommodations  were  not  lost  sight  of  in  transferring 
these  properties  to  private  hands,  and  it  was  sought  to  perpetuate  them 
as  Michigan  roads  after  their  sale  had  taken  place  by  obliging  the  pur- 
chasing companies  to  accept  the  exact  routes  which  had  been  assigned 
to  the  original  roads. 

The  early  proposal  then  of  the  Central's  owners  to  continue  their  line 
to  Chicago  met  with  a  vigorous  condemnatory  memorial  from  the  legis- 
lature*36 as  did  also  the  actual  adoption  of  Toledo  as  its  eastern  terminus 
by  the  Southern  instead  of  the  commonwealth's  choice,  the  city  of  Mon- 
roe.*37 Ultimately  the  interests  of  trade  prevailed  in  each  instance  and 
the  charters  to  both  the  Central  and  the  Southern  were  so  amended  in 
1855  as  to  permit  each  the  desired  foreign  connection.*38 

The  division  of  the  securities  of  these  roads  into  portions  which  should 
represent  the  parts  of  the  systems  within  the  state  and  the  parts  without 
now  became  the  problem  of  taxation.  The  legal  aspects  of  the  matter 
were  soon  settled  since  in  response  to  a  petition  from  the  roads  to  the 
legislature  "that  the  capital  stock  expended  within  the  state  shall  alone 
be  liable  for  the  state  tax"*39  Attorney  General  Hale  offered  the  opinion 
that  only  this  part  could  be  taxed  "and  the  reports  of  the  roads  as  to 
their  proportions  must  be  accepted."*40  Under  the  easy  conditions  thus 
laid  down  which  allowed  the  roads  to  designate  the  proportions  of  their 
securities  upon  which  they  wished  to  pay  taxes,  no  further  difficulties, 
of  course,  were  experienced  with  the  localization  problem. 

The  machinery  for  administering  the  tax  was  of  the  simplest  possible 
type.  The  roads  were  to  furnish  the  state  auditor  each  year  with  reports 
to  which  certain  officers  of  the  company  took  oath  and  from  which  the 
auditor  certified  to  the  state  treasurer  the  amount  of  the  tax  to  be  col- 
lected. The  levy  was  essentially  a  self-imposed  one  since  no  means  were 
provided  any  where  by  which  the  state  might  ascertain  the  veracity  of 
these  reports  and  their  truthfulness  seems  never  to  have  been  officially 
questioned. 

The  early  reports  were  sharply  restricted  in  their  scope  to  such  mat- 
ters as  would  be  useful  for  assessment  purposes.  A  few  details  con- 
cerning stocks  and  indebtedness,  the  number  of  men  employed,  the 
amounts  of  dividends,  length  of  mileage  and  the  names  of  officers  sufficed 
to  answer  the  questions  upon  which  the  state  sought  information.  The 

*MSen.   Doc.   1851.     No.   17. 

*37House   Doc.    1850.      No.    10. 

*38Statutes   1855.   p.   300  and   304;   also   Stat.   1848,   p.   276. 

*39Sen.   Doc.    1850.      No.    17,   p.   42. 

**°Sen.   Doc.   1859.      Doc.   3,   p.   4. 


18  MICHIGAN   STATE  LIBRARY. 

demands  of  "publicity"  were  still  to  be  felt  before  these  reports  should 
become  the  voluminous  documents  with  which  we  are  now  familiar. 
No  responsive  warmth  favorable  to  reports  was  aroused  in  the  roads 
however,  in  return  for  the  extreme  moderation  of  the  state  in  its  in- 
quiries. 

"When  the  present  auditor  general  took  charge  of  the  depart- 
ment," says  Auditor  Humphrey  in  1868,  "a  number  of  the  railroad 
and  railway  companies  in  the  state,  although  they  had  been  in 
operation  for  years,  had  never  made  a  report  upon  which  the  tax 
could  be  assessed,  and  to  that  time  had  escaped  all  taxation.  A 
reference  to  the  report  from  this  department  for  the  year  1866 
shows  that  but  twelve  of  the  twenty-two  railroad  and  railway  com- 
panies had  reported  as  required  by  law."*41 

The  remissnesses  on  the  part  of  the  roads  which  have  just  been  de- 
scribed had  not  been  overlooked  however  by  legislation,  since  as  early 
as  1853  a  law  had  been  passed  which  enabled  the  auditor  general  to 
"ascertain  the  amount  of  specific  tax  of  any  corporation  failing  to  make 
the  required  report,  as  appears  from  their  last  report."*42  The  inade- 
quacy of  this  remedy  was  not  slow  in  discovering  itself.  The  companies 
simply  ignored  their  obligations  with  regard  to  reports  and  made  none 
of  any  sort  whatsoever  and  the  extent  of  their  perverseness  in  this  re- 
spect is  measured  in  part  by  the  complaint  just  noticed  from  Auditor 
Humphrey. 

The  publication  of  road  reports  for  general  distribution  was  com- 
menced by  Auditor  Humphrey  in  1868  and  the  advertising  opportunities, 
which  were  thus  presented  to  the  companies  through  this  official  display 
of  their  resources  to  the  public  stirred  many  of  them  seemingly  to 
greater  readiness  in  supplying  data.  But  it  was  through  an  enactment 
of  1872  that  the  cure  was  finally  provided  which  put  an  end  to  the  neglect 
of  reports.  By  the  provisions  of  this  law  the  auditor  was  authorized  to 
"estimate  the  amount  of  tax  due  from  and  payable  by  such  corporations 
from  the  best  information  he  may  be  able  to  obtain  whenever  such  cor- 
poration shall  refuse  or  neglect  to  make  report  as  required  by  law."*43 
The  tax  rate  upon  the  charter  roads — one-half  of  one  per  cent  the  first 
five  years  and  three-fourths  thereafter — was  apparently  a  triumph  for 
the  companies  in  their  bargaining  with  the  state.  It  is  indeed  small  in 
comparison  with  the  one  and  six-tenths  per  cent  which  constituted  the 
tax  for  general  purposes  upon  all  other  property  which  the  same  legis- 
lature imposed  that  sold  the  roads  to  the  companies.  The  discrepancy, 
however,  between  the  rates  which  the  legislature  of  1846  voted  upon 
roads  and  the  one  voted  upon  general  property  appears  less  striking  when 
it  is  considered  that  the  former  were  assessed  at  approximately  a  full 
valuation  at  this  time  while  general  property  was  greatly  under- 
valued.*44 

A  pronounced  disparity  in  the  taxation  of  the  two  kinds  of  prop- 
erty so  far  as  the  rate  is  concerned  is  not  apparent  indeed  for  many 
years.  A  careful  computation  which  was  made  by  Auditor  Humphrey 
in  1870,  for  example,  shows  that  the  expenses  of  government  necessi- 
tated a  tax  of  only  three-fourths  of  one  per  cent  upon  the  actual  value 


*41Aud.   Rep.    1868,   p.    13. 
**2Stat.    1853,   Act   22. 
*«Stat.  1872,  Act  57. 

*44Aud.   Rep.   1846.     A  tabulation  found  here  shows  a  decrease  in  the  assessed  valuation 
of  the  state  from  $43,000,000  in  1838  to  $29,000,000  at  the  date  of  tabulation. 


RAILROAD    TAXATION    IN   MICHIGAN.  19 

of  the  property  in  the  state  while  as  a  result  of  the  under-assessment  of 
this  property  the  actual  rate  was  two  and  one-half  per  cent,  thus  demon- 
strating that  the  roads  were  not  under-taxed  at  this  time.*4  But  on 
the  other  hand,  by  the  end  of  the  century,  and  after  the  state  tax  com- 
mission had  thoroughly  satisfied  itself  as  to  the  real  value  of  the  state's 
taxable  property,  a  tax  which  was  approximately  one  and  one-half  per 
cent  was  ascertained  to  be  the  average  rate  to  which  ordinary  property 
was  liable.*46  Manifestly  the  growth  in  the  rate  of  taxation  upon  general 
property  had  by  this  time  outstripped  the  rate  to  which  the  charter 
roads  would  have  been  liable  had  they  continued  under  the  capitalization 
tax  until  this  time  and  a  disparity  which  was  equal  to  the  doubling  of 
the  impost  upon  ordinary  property  as  compared  with  that  upon  the  roads 
could  no  longer  be  ignored. 

The  productiveness  of  the  capitalization  tax  in  its  application  to  the 
charter  roads  was  obviously  capable  of  expansion  only  as  the  number 
of  taxable  securities  increased  since  the  tax  rate  was  unalterable.  The 
numbers  of  these  securities  grew  from  period  to  period  with  the  growth 
in  value  of  the  roads  though  the  full  harvest  of  revenues  from  these  in- 
creases was  denied  the  state  through  administrative  neglect  in  enforc- 
ing the  tax  rigorously  from  year  to  year.  The  tax  itself  exercised  ap- 
parently little  or  no  deterrent  effect  upon  the  growth  in  numbers  of 
these  securities  since  two  of  the  roads — the  Central  and  the  Southern — 
allowed  themselves  capitalizations  which,  in  spite  of  the  tax,  were  ap- 
proximately equal  by  the  end  of  the  century  to  the  valuations  assigned 
them  by  the  "great  appraisal."*47  It  was  therefore  largely  the  leanness 
of  the  rate  which  caused  these  roads  to  contribute  so  meagerly  to  the 
support  of  government  as  to  arouse  against  them  by  the  end  of  the 
century  a  popular  uprising — contributions  which  were  indeed  only 
as  one  to  three  when  the  revenues  developed  by  this  capitalization  tax 
during  its  last  years  are  compared  with  the  revenues  from  the  ad  valorem 
property  tax  during  its  first.*48 

The  short  comings  of  the  capitalization  tax  both  in  principle  and  in 
administration  are  not  explainable  as  acts  of  forbearance  on  the  part 
of  the  state  by  which  the  roads  should  receive  a  sort  of  public  bounty 
—the  explanation  which  is  usually  employed  to  account  for  laxity  in 
the  early  taxation  of  railroads.  On  the  contrary,  an  avowed  reason  from 
the  legislative  committee  on  sales  for  disposing  of  the  roads  was  the 
revenue  which  should  be  derived  thereafter  from  these  properties  by 
taxation.  The  expectations  of  the  times  in  regard  to  the  productiveness 
of  this  tax  seems  in  fact  to  have  bordered  the  fanciful.  "With  the  ap- 
plication of  three-fourths  of  one  per  cent  in  1851"  estimates  Governor 
Kansom,  "there  will  be  afforded  a  sum  sufficient  to  meet  all  necessary 
expenses  of  the  state  government  leaving  the  whole  amount  of  the  state 
tax  to  be  applied  in  the  payment  of  the  public  debt.*49 

*«Auditor's   Rep.   1870,   p.   54. 

*«Rep.   of  State  Tax  Com.   1902,  p.  69. 

*47The  stocks  and  bonds  upon  which  the  Central  would  have  paid  taxes  in  1900  had  capitalization 
continued  the  equivalent  of  costs  equalled  $26,042,123.57;  the  Southern  $6.232,480.  See  reports  of 
the  Central  and  Southern  for  1900  for  construction  costs.  The  official  valuation  in  1901  equalled  for 
the  Central  $26,764.263,  for  the  Southern  $6,992,965.  See  Cooley-Adams  Appraisal,  Report  of  State 
Tax  Com.  1900,  p.  180. 

*48See  table  on  page  55. 
*49Message  1849,  p.  3. 


20  MICHIGAN   STATE   LIBRARY. 

That  a  half  century  was  allowed  to  elapse  without  the  improvement 
of  a  tax  of  such  an  unsatisfactory  character  is  most  immediately  ac- 
counted for  by  the  apparently  indestructible  character  of  the  special 
charters.  The  disposition  of  these  charters  was  an  insolvable  problem 
for  many  years.  The  state  lacked,  also,  specialized  administrative  offi- 
cers who  should  devote  themselves  to  the  consideration  and  management 
of  railroad  taxes  and  who  should  acquaint  the  public  with  information 
concerning  this  form  of  taxation.  But,  far  more  than  for  any  other 
reason,  save  perhaps,  inherent  weakness  in  principle,  the  general  insig- 
nificance of  the  capitalization  tax,  which  we  have  described,  resulted 
directly  from  public  indifference  during  the  period  of  this  tax  to  the 
whole  question  of  railroad  taxation. 


RAILROAD    TAXATION    IN    MICHIGAN.  21 


CHAPTER  TWO. 

THE  GROSS  INCOME  TAX. 

The  new  impost*1  which  supplanted  the  capitalization  tax  used  gross 
incomes  from  the  railroads  as  its  base.  It  became  immediately  opera- 
tive upon  all  the  general  law  roads — forty  or  more — within  the  state, 
and  eventually  the  charter  roads  too  accepted  its  provisions. 

I.'    THE  "MUNICIPAL  AID"  MOVEMENT. 

The  new  taxing  law  was  clearly  an  outcome  from  a  violent  agita- 
tion concerning  railroads  which  had  disturbed  the  state  for  more  than 
a  decade.  The  movement  resembled  in  many  ways  the  earlier  "internal 
improvement'7  activity  and  has  been  not  inaptly  called  the  "municipal 
aid  mania."*2  The  building  of  many  new  railroads,  the  establishment 
of  the  office  of  railroad  commissioner*3  and  the  adoption  of  an  amend- 
ment to  the  state  constitution  asserting  full  public  authority  in  deter- 
mining railroad  rates*4  were  still  other  important  issues  from  this  excite- 
ment. 

Railroad  "promoting"  by  township,  village  and  city  governments  is 
the  characteristic  from  which  the  agitation  derived  its  name,  and  the  two 
legislatures  of  1865  and  '67  received  petitions  for  enabling  acts  with 
which  aid  might  be  given  to  roads  involving  scores  of  municipalities.  The 
culmination  of  opportunities  of  this  sort  to  the  municipalities,  however, 
was  apparently  reached  in  1869,  when,  through  the  adoption  of  a  general 
law,  all  these  minor  political  divisions  were  empowered  to  give  aid  at 
will. 

The  road  building  impulse  itself  sprang  naturally  from  the  business 
revival  which  followed  the  civil  war  and,  especially  in  Michigan,  from 
the  traffic  demands  of  the  newly  developed  lumbering  industry  which  was 
so  soon  to  dominate  the  industries  of  the  state.  The  strength  of  the  im- 
pulse is  suggested  by  the  assertion  from  Governor  Baldwin  in  his  mes- 
sage of  1873,  that 

"railroads  have  unquestionably  been  the  most  important  causes 
which  have  led  -to  the  development  of  the  state  within  the  last  few 
years.  On  the  first  day  of  January  in  1869,  Michigan  had  1,199 
miles  of  railway  in  operation,  since  that  date  1,808  miles  had  been 
completed,  or  150  per  cent  more  than  the  entire  length  constructed 
during  the  entire  previous  history  of  the  state."*5 

*1Mich.   Statutes   1871.   p.    3.14. 

*2The  character  of  this  mania  may  be  roughly  estimated  by  the  enthusiasm  with  which 
railroad  projects  were  everywhere  received.  Lansing,  the  state  capital,  in  one  year  (1869) 
was  the  focus  of  six  railroads  all  of  them  receiving  "municipal  aid,"  while  tw'o  more  had 
been  granted  articles  to  build  to  Lansing  and  still  another  was  being  promoted.  Lansing 
was  already  the  terminus  of  a  "land  grant"  road  and  of  another  built  by  "municipal  aid." 
No  trade  resources  could  possibly  have  been  found  in  an  inland  city  of  6.500  inhabitants 
to  warrant  the  need  of  eleven  railroads  and  public  excitement  must  probably  be  credited 
with  such  a  large  prospective  supply.  (See  State  Republican,  Oct.  14,  1869.) 

*8Laws   1873.   p.   91. 

*4Laws  of  1870,  p.  13. 

*sGovernor  Baldwin's   message   1873,   p.   40. 
4 


22  MICHIGAN   STATE   LIBRARY. 

Gratifying  as  results  like  these  must  have  been  to  the  friends  of  the 
commonwealth  the  debts,  which  the  municipalities  had  necessarily  in- 
curred in  supporting  the  movement  stirred  enmity  to  ''municipal  aid" 
from  the  beginning.  Governor  Crapo,  the  state  executive  during  four 
years  of  this  period,  vetoed  more  than  twenty  enabling  acts  voted  by  the 
legislature  of  1867  and  condemned  in  many  vigorous  messages  the  whole 
"aid"  policy.*6  Some  of  the  large  city  newspapers  were  unvarying  too 
in  their  hostility,  and  finally,  in  1870,  a  decision  from  the  supreme  court 
was  rendered  which  declared  the  complete  illegality  of  any  debts  con- 
tracted by  the  municipalities  in  the  furtherance  of  the  municipal  aid 
policy*7  and  the  whole  activity  was  seen  at  last  to  be  at  an  end  when 
a  special  session  of  the  legislature  was  unsuccessful  in  annulling  the 
court's  decision  by  securing  the  adoption  of  a  constitutional  amendment 
which  had  been  proposed.*8 

The  fiscal  obligations  of  the  railroads  were  not  neglected  during  this 
great  ferment.  The  same  legislature  which  enacted  the  municipal  aid 
law  provided  also  that  the  capitalization  tax  of  one  per  cent  should  be 
extended  to  all  receipts  from  this  "aid,"  to  receipts  from  land  bounties 
and  to  receipts  of  all  other  kinds  which  should  be  employed  in  road  con- 
struction.*9 A  tax  of  this  sort  was  too  exorbitant  to  remain  long  upon 
the  statute  books,  especially  since  it  was  opposed  uniformly  by  the  gen- 
eral law  roads  to  all  of  which  it  applied.  The  annulment  of  the  "munici- 
pal aid"  legislation  by  the  supreme  court  left  the  roads  with  no  important 
exceptional  resources  of  any  sort  and  it  was  plain  that  many  of  the  newer 
roads  would  be  injuriously  affected  unless  a  remedy  could  be  provided 
against  this  heavy  tax.  The  legislature,  therefore,  which  convened  the 
year  following  the  famous  decision  not  only  repealed  the  burdensome 
tax  but  returned  to  the  companies  all  collections  made  under  its  pro- 
visions,*10 and,  finally,  commenced  a  new  order  of  railroad  taxation  by 
enacting  the  income  tax. 

This  change,  although  of  great  moment,  was  effected  without  extended 
comment  either  within  the  legislative  chambers  or  by  the  newspapers 
of  the  day — the  newness  and  unimportance  from  a  traditional  standpoint 
of  the  general  law  roads,  to  which  alone  the  new  tax  applied,  furnishing 
the  clearest  explanation  of  this  absence  of  interest  in  a  new  method  of 
taxation. 

The  new  law  resulted 'in  a  distinct  lowering  of  the  payments  made 
by  the  railroads  and  this  effect,  when  noticed,  was  complained  of  by 
Auditor  General  Humphrey  as  follows,  "the  act  of  1871  for  the  incor- 
poration of  railroads  changed  the  basis  of  taxation  for  such  companies. 
The  result  has  been  a  falling  off  in  receipts  from  such  taxes."*11  That 
such  an  outcome,  however,  was  distasteful  to  the  people  of  the  state  can 
not  easily  be  proven.  The  state  was  still  illy  provided  with  railroads 
and  the  capitalization  tax  had  been  a  levy  upon  railroad  construction. 
Under  the  new  law  there  was  to  be  no  contribution  from  the  roads  until 
a  traffic  had  been  developed — a  contingent  basis  of  taxation  to  the  com- 
panies which  offered  loop  holes  for  escape  as  compared  with  the  exacting 

*6Veto   Messages,   Sen.   Jour.    1867,   p.   750. 

*7De'roit,  Lansing  and  Northern  R.  R.  Co.  vs.   Salem  Township,  20  Michigan  Rep.  p.   450. 

*8Laws    of    1870.      Special    Session. 

*9Laws   of   1869,   p.    262. 

*10Laws   of   1871,   Act    106. 

*nAud.   Rep.   1872,   p.   21. 


RAILROAD    TAXATION    IN    MICHIGAN.  23 

character  of  the  taxing  base  which  was  furnished  by  the  hard  and  fast 
construction  costs. 

The  tax  was  re-enacted  three  times  during  its  history  and  was  sub- 
jected to  many  amendments.  In  1891  the  leveling  spirit  in  the  legisla- 
ture attempted  the  extension  of  the  income  tax  to  the  charter  roads.*12 
The  feasibility  of  this  procedure  had  been  the  theme  of  several  legisla- 
tive inquiries,  the  occasion  of  repeated  litigation  in  the  supreme  court, 
and  the  achievement  of  this  result  was  destined  finally  to  become  one  of 
the  chief  incentives  to  the  repeal  of  the  special  charters.  Eventually  all 
of  these  especially  privileged  roads  complied  with  the  legislation  of 
1891, *13  so  far  as  it  pertained  to  taxation,  but  the  equivocal  character 
of  this  compliance  is  shown  by  the  immediate  return  of  most  of  them  to 
the  provisions  of  their  charters  when  by  the  enactment  of  the  Merriman 
law  of  1897*14  a  higher  rate  of  taxation  upon  incomes  was  established. 

II.     ADMINISTRATION  AND  CHARACTERISTICS  OF  THE  TAX. 

The  new  taxing  law  provided  that  "every  company"  (general  law  com- 
pany) 

"shall  pay  a  tax  computed  in  the  following  manner,  viz :  upon  the 
gross  receipts  to  the  amount  of  three  thousand  dollars  per  mile  of 
road  regularly  operated  (or  less)  one  and  one-half  per  cent;  upon 
the  receipts  in  excess  of  three  thousand  dollars  and  less  than  six 
thousand  dollars,  per  mile,  two  per  cent  and  upon  the  gross  income 
equal  to  or  in  excess  of  six  thousand  dollars  per  mile,  three  per 
cent." 

The  local  taxation  of  roads  also  was  forbidden  in  this  law  by  the  usual 
exempting  phrase, 

"which  tax  shall  be  in  lieu  of  all  other  taxes  upon  the  property  of 
the  company — except  real  property  not  necessary  for  carrying  on 
the  ordinary  operations  or  franchises  of  the  roads." 

1.     The  Bases  of  Taxation;  Definition  of  Terms;  Localization  of  Income. 

This  separation  of  the  railroad  property  which  is  functional  from 
that  which  is  merely  collateral  as  provided  for  in  the  clause  last  quoted, 
is  a  fnmiliar  requirement  in  most  schemes  of  state  administered  railroad 
taxation,  but  its  practical  achievement  in  Michigan  seems  at  no  time 
to  have  been  an  easy  task.  The  phraseology  which  describes  these  two 
species  of  railroad  property  though  carefully  elaborated  in  the  second 
enactment  of  the  taxing  law.  has  indeed  required  frequent  interpreta- 
tions from  the  courts  in  order  to  settle  the  jurisdictions  to  which  indi- 
vidual pieces  of  railroad  property  were  liable.*15 

To  the  railroads  the  delimitation  which  should  be  applied  might  in- 
deed work  double  taxation  owing  to  the  careless  interpretation,  which 
from  the  first  was  given  in  Michigan,  to  the  term  "gross  income."  The 
new  taxing  base  was  here  without  the  usual  qualifications  found  in 
statutes  of  similar  nature  in  other  states  of  "gross  income  from  trans- 
portation" or  "gross  income  from  operation,"  and,  as  administered  by 
taxing  officials  and  construed  by  the  courts,  "gross  income"  from  ail 

*12Mich.   Statutes  1891.  Act  No.   133 

*13Laws   1891,   Act   133. 

*^Law   1897,   p.   293. 

*15G.  R.  &  I.  R.  R.  vs.  City  of  Grand  Rapids.     137  Mich.  Rep.,  p.  587. 


24  MICHIGAN   STATE   LIBRARY. 

sources  in  Michigan  became  subject  to  taxation.  Under  conditions  of 
this  sort  collateral  property  might  be  taxed  locally  and  its  rental  or  sale 
proceeds  again  contribute  to  the  support  of  government  through  enter- 
ing into  the  gross  income  of  the  proprietary  road.  A  taxing  base  so 
illy  determined  became  the  source  of  much  confusion  to  administrative 
officials  when  in  the  later  history  of  the  law  the  policy  was  adopted  of 
applying  the  impost  vigorously  and  Commissioner  Osborn  complains  in 
his  report  of  1898 

"that  if  the  plan  of  taxing  upon  gross  income  is  perpetuated  it 
would  be  wise  on  the  part  of  the  legislature  to  further  particularize 
and  declare  just  what  is  defined  and  incorporated  by  the  term  "gross 
income."*16 

The  fatal  defect,  theoretically  at  least,  in  income  taxes  generally,  of 
not  distinguishing  the  sources  from  which  taxable  income  is  derived 
might  easily  have  been  avoided  it  would  seem  in  the  case  of  taxpayers 
with  such  an  uniform  source  of  revenue  as  have  railroads  if  a  closer 
definition  of  the  term  "gross  income"  had  prevailed.  Nevertheless,  the 
term  was  understood  in  Michigan  to  include  receipts  of  all  sorts,  and 
tax  administrators  uniformly  applied  the  impost  to  incomes  from  sources 
so  diverse  as  those  from  building  rentals,  car  ferries,  mines,  elevators, 
stone  quarries  and  warehouses  as  well  as  to  those  from  railroad  opera- 
tions.*17 The  first  requisite  of  a  good  income  tax, — namely,  that  it  be 
levied  upon  incomes  which  are  naturally  homogeneous  was  in  this  way 
violated  by  the  Michigan  statute. 

The  importance  of  the  term  "per  mile"  in  measuring  the  number  and 
the  quality  of  the  units  of  income  to  which  the  tax  should  be  applied  was 
early  recognized.  Commissioner  Williams  complains  at  length  in  1879 
of  "the  serious  variations  in  the  reported  lengths  of  some  of  our  older 
roads."*18  The  Chicago  and  Northwestern,  for  instance,  insisted,  when 
reporting  its  income  "per  mile"  in  1881,  upon  using  its  entire  mileage 
whether  of  owned  or  of  rented  lines,  in  Michigan  or  elsewhere,  as  the 
divisior  by  which  to  derive  from  its  gross  income  its  taxable  income 
per  mile.*19  The  railroad  commissioner  reports  a  decrease  in  taxable 
income  for  this  road  of  nearly  |3,000  per  mile  as  the  result  of  using  so 
much  mileage  as  a  divisor  in  comparison  with  the  amount  used  in  pre- 
vious years.  The  road  was  clearly  in  the  wrong  and  subsequently  the 
supreme  court  established  the  meaning  of  the  term  "per  mile"  as  indi- 
cating "the  number  of  miles  between  the  terminals  of  the  road  consti- 
tuting the  main  line."*20 

The  localization  of  income  from  interstate  roads  for  taxation  pur- 
poses was  another  administrative  task  which  w^as  sure  to  present  diffi- 
culties. The  original  law  of  1871  made  no  provision  respecting  this 
matter,  but,  with  the  revision  of  this  statute  two  years  later  the  rule  was 
legalized  which  had  thus  far  been  practiced  as  a  custom,  namely, 

"that  when  a  road  lies  partly  within  and  partly  without  this  state, 
there  shall  be  paid  such  portions  of  the  tax  herein  imposed  as  the 
length  of  the  road  within  this  state  bears  to  the  whole  length  of 
the  operated  portion  thereof."*21 

*16Mich.    R.    R.    Com.    Rep.    1898,    p.    34. 

*17R.   R.   Com.   Rep.    1899,   p      10. 

*18R.    R.   Com.    Rep.    1879.   p.   9. 

*19R.    R.    Com.    Rep.    1881,   p.    32. 

*20Union  Depot  Co.   vs.   R.   R.   Com.      118  Mich.   Rep.,  p.   347. 

*21Laws   of   1873,   p.   532. 


RAILROAD    TAXATION    IN    MICHIGAN.  25 

Practically  applied  the  administration  of  this  rule  required  that  the 
total  earnings  of  the  interstate  roads  should  be  first  ascertained.  These 
were  then  divided  in  accordance  with  the  proportions  of  the  road  which 
were  within  Michigan  as  compared  with  the  proportions  which  were  else- 
where and  the  share  which  fell  to  Michigan  was  then  levied  upon. 

The  problem  writh  regard  to  interstate  roads,  was  chiefly  the  legal  one 
as  to  whether  or  not  this  rule  of  assessment,  which  involved  earnings 
made  in  other  states,  was  an  interference  with  the  commerce  between 
states  over  which  the  national  government  claimed  exclusive  juris- 
diction. The  constitutionality  of  the  Michigan  tax  was  not  tested  in 
court  until  late  in  its  history  and  then  only  in  part,*22  but  nevertheless, 
the  impost  in  this  state  did  not  wholly  escape  the  influence  of  this  doubt- 
ful constitutional  status.*23  The  matter  was  indeed  a  constantly  re- 
curring theme  for  comment  in  the  reports  of  the  railroad  commissioners 
and  the  readings  of  the  taxing  statute  underwent  marked  changes  from 
time  to  time  in  order  to  secure  better  conformity  with  constitutional 
requirements. 

The  report  of  Commissioner  Kich  in  1890,  for  instance,  advises  upon 
this  question  of  constitutionality  that 

"the  United  States  courts  as  well  as  a  number  of  state  supreme 
courts  have  recently  decided  that  in  taxing  on  gross  receipts  only 
those  receipts  can  be  taxed  which  are  earned  on  business  done 
wholly  within  the  state.  One  case  now  pending  against  the  St.  Paul, 
Minneapolis  and  Sault  Ste.  Marie  R.  R.  Co.  involves  this  question 
and  in  case  it  should  finally  reach  the  United  States  supreme  court 
it  will  undoubtedly  be  decided  as  against  the  state.  Substantially 
the  same  results  can  be  reached  by  providing  for  a  board  to  deter- 
mine the  value  of  each  railroad  per  mile  including  its  equipments 
and  the  gross  earnings  can  be  the  basis  of  ascertaining  the  value 
of  the  properties  for  taxation  purposes."*24 

The  new  taxing  law  which  issued  from  the  legislative  session  of  the 
year  which  followed  this  report  showed  fruitage  from  the  commissioner's 
counsel.  The  phraseology  of  the  new  act  had  been  so  worded  that  the 
familiar  terms  of  the  previous  statutes  "shall  pay  an  annual  tax  on  the 
gross  receipts  of  such  company,"  were  now  supplanted  by  the  expression, 
"shall  pay  a  specific  tax  upon  the  property  and  business  of  such  cor- 
poration."*25 The  tax,  however,  which  was  imposed,  was  identical  in 
character  with  the  previous  ones,  gross  receipts  remained  as  before  the 
objects  upon  which  the  levy  was  made  and  the  administrative  machinery 
remained  essentially  unaltered.  It  is  difficult  to  believe,  therefore,  al- 
though in  each  subsequent  enactment  of  the  law  this  phrase,  "upon 
the  property  and  business,"  was  scrupulously  retained,  that  the  con- 
stitutionality of  the  tax  was  materially  improved  by  the  substitution 
of  the  new  words.  The  merely  verbal  character  of  the  change  is  further 

*KWis.    &   Mich.    R.    R.    Co.    vs.    R.    R.    Com.      191    U.    S.    Rep.,   p.    379. 

*23Accutely  suggestive  of  restrictive  consequences  was  the  suit  entitled  Fargo  vs.  Mich. 
(121  U.  S.  Rep.  p.  230)  in  which  were  involved  seemingly  the  essential  questions  which  a 
court  would  have  to  decide  were  the  litigation  against  the  tax  on  railroads  instead  of  that 
on  a  fast  freight  line.  The  history  of  this  epochal  case  is  briefly  as  follows :  In  1883 
the  state  extended  the  gross  income  tax  to  fast  freight  lines.  One  of  these  resisted  the  tax 
as  unconstitutional  through  taxing  interstate  commerce  and  endeavored  to  restrain  the 
state  from  collecting  the  tax.  The  s+ate  supreme  court  denied  the  restraining  order,  but 
the  federal  supreme  court  sustained  the  contention  of  tBe  company  that  the  tax  was  un- 
constitutional. 

*-'-R.   R.   Tom.   Rep.   1890,  p.   37. 

*25Laws  of  1891,   p.   217. 


26  MICHIGAN   STATE   LIBRARY. 

proven  by  the  fact  that  the  real  nature  of  the  tax  apparently  remained 
unaltered  from  the  view  point  of  the  public.  The  tax  seems  to  have 
remained  in  the  popular  regard  as  a  tax  upon  gross  receipts  until  the 
time  of  its  repeal  and  indeed  in  the  debates  and  discussions  of  the  equal 
taxation  movement  no  contention  was  at  any  time  emphasized  that  the 
railroads  were  taxed  upon  their  business  and  property. 

An  amendment  of  a  more  radical  nature  was  made  by  the  legislature 
of  1893,  in  which  the  practice  of  employing  all  the  earnings  of  inter- 
state roads  in  the  determination  of  this  mileage  income  was  abandoned. 
The  portion  of  a  road's  earnings  which  came  from  interstate  commerce 
was  to  be  levied  upon  under  this  new  act  separately  from  the  portion 
which  came  from  commerce  carried  on  within  the  state  and  this  first 
portion  was  to  be  proportioned  "as  the  length  of  road  over  which  inter- 
state business  is  carried  in  this  state,  bears  to  the  entire  length  of  the 
road  over  which  said  interstate  business  is  carried."*26  In  a  word  upon 
interstate  commerce  the  train  mileage  method  of  proportioning  gross 
receipts  was  substituted  for  that  of  the  track  mileage.  The  new  rule 
made  the  processes  of  determining  the  gross  receipts  of  the  roads  more 
complicated  than  ever  and  apparently  operated  to  reduce  the  amounts 
upon  which  taxes  were  paid*27  and  the  disturbing  fact  remained,  more- 
over, to  those  who  hoped  to  find  in  this  amendment  an  improved  con- 
stitutional status  for  the  law  that  earnings  made  in  other  states  were 
still  involved  in  the  computation  of  the  tax.  The  incisive  criticism  is 
made  by  Commissioner  Wesselius  "that  the  law  in  thus  saying  that  the 
tax  is  then  upon  state  commerce  alone  denies  that  two  parts  constitutes 
the  whole."*28 

Still  another  remedy  was  thought  to  have  been  discovered  by  the  legis- 
lature of  1891  by  which  dissatisfaction  on  the  part  of  either  the  roads  or 
the  state  might  be  mollified  (in  this  way  apparently  preventing  appeals 
to  the  courts)  through  the  provision  of  a  permanent  arbitration  board— 
the  State  Board  of  Railroad  Crossings — to  which  either  of  the  two 
parties  involved  in  the  taxation  of  interstate  commerce  should  appeal  for 
redress.*29  The  spectre  of  discord  which  stirred  the  legislature  was 
more  imaginary  than  real  apparently  since  nothing  of  importance  has 
ever  developed  from  this  arrangement. 

2.     The  Tax. 

The  tax  rate  provided  by  the  new  system  was  very  complicated  and 
has  been  aptly  described  as  a  "sliding  scale"  rate.  In  the  terms  of  the 
taxing  law  which  prevailed  during  the  first  two  decades 

"Every  company  shall  pay    an  annual    tax  computed  in  the  fol- 
lowing manner,  viz. :     Upon  such  gross  receipts  not  exceeding  four 
thousand  dollars  in  amount  per  mile  of  road  operated,  two  per  cent 
of  such  gross  earnings;  upon  such  gross  receipts  in  excess  of  four 
thousand  dollars  per  mile  so  operated,  three  per  cent  thereof." 
In  practice  a  provision  of  this  sort  necessitated  the  application  to  the 
companies  of  a  variable  rate.     The  units  of  income  per  mile  earned  by 
a  company,  which  were  subject  to  the  lowest  rate,  would  be  taxed  in  the 
first  instance;  surplusage  of  income  over  the  amount  per  mile  which 

*26Laws   of  1893,   p.   217. 
*27R.   R.   Com.   Rep.   1897,   p.   XII. 
*28R.  R.  Com.  Rep.   1898. 
*29Laws  of  1891,  p.  218. 


RAILROAD    TAXATION    IN    MICHIGAN.  2* 

was  amenable  to  the  lowest  rate  would  then  be  levied  upon  with  the 
higher  rate. 

A  tax  of  this  sort  offended  seriously  the  time  worn  canon  "that  a  tax 
ought  to  be  certain,  ought  all  to  be  clear  and  plain  to  the  contributor 
and  to  every  other  person,"  since  no  one  could  possibly  tell  before  hand 
—especially  after  the  taxing  scale  became  more  graduated — the  tax  rate 
to  which  any  important  road  was  subject.  The  rate  paid  by  the  Grand 
Trunk  Western,  for  example,  during  a  period  of  ten  years  varied  with 
each  year  though  in  the  meantime  no  alteration  had  taken  place  in  the 
terms"  of  the  law.*30  Popularly  indeed, — so  great  was  the  confusion 
upon  this  subject, — the  tax  seems  to  have  been  accepted  as  the  mere  ap- 
plication of  the  progressive  income  principle  to  the  taxing  of  rail- 
roads*31 although  the  real  situation  was  far  different. 

The  obvious  intention  of  using  a  rate  of  this  sort  was  that  of  discrim- 
inating among  roads  so  that  those  wtth  larger  earnings  should  pay  higher 
taxes  as  compared  with  the  poorer  or  less  profitable  roads.  The  com- 
monwealth's uncompleted  railroad  net  furnished  at  all  times  marked 
contrasts  in  the  earning  capacities  of  the  different  roads  due  to  vary- 
ing business  opportunities,  varying  stages  of  completedness  or  incom- 
pletedness  and  to  variations  in  costs  of  operation  and  maintenance,  and 
discriminations  of  the  sort  which  the  law  sought  to  make  seem  to  have 
been  wholly  justifiable. 

The  plan  adopted,  however,  had  little  merit  as  an  accurate  means  of 
measuring  this  ability  to  pay.  The  statute  in  its  desire  to  accurately 
discriminate  faculty  made  provision  for  two  refinements  upon  the  simple 
ordinary  income  tax,  namely,  the  "per  mile"  method  of  grouping  in- 
comes and  the  graduation  of  the  rate  and  of  these  the  graduated  rate 
is  of  most  significance  since  it  is  clear  that  the  mere  grouping  of  in- 
come into  mileage  aggregates  would  have  no  consequences  if  a  uniform 
or  flat  rate  only  were  imposed.  But  the  selective  efficacy  of  the  Michi- 
gan rate  in  discriminating  among  the  roads  was  neutralized  by  the  appli- 
cation of  the  first  term  in  the  rate  scale  to  the  lowest  per  mileage  in- 
come groups  of  all  roads  alike  leaving  the  higher  terms  of  the  scale  to 
be  applied  to  the  exceSvS  income  only  of  the  denser  traffic  roads.  An 
examination  of  the  tax  reports  of  the  railroad  commissioners  shows  that 
no  road  ever  contributed  to  the  state  upon  all  its  income  at  a  rate  which 
would  equal  the  highest  term  in  the  scale  and  that  the  customary  tax 
rate  upon  the  more  profitable  roads  was  the  lowest  term  in  the  scale 
plus  some  fraction  of  the  higher  ones. 

The  faculty  measuring  device,  too,  which  was  used  to  distinguish 
the  units  of  income  with  high  taxableness  from  those  with  low  was  so 
arbitrarily  applied  as  to  constitute  another  defect.  The  tax  paying 
ability  of  a  unit  of  gross  income  is  fairly  measured  by  the  portion  of 
its  whole  amount  which  is  net  and  the  expenses  which  are  deducted  to 
procure  this  net  residum  are  roughly,  though  customarily  measured  by 
the  extent  of  road  operated  relative  to  the  amount  of  income  procured 
—in  a  word  by  the  "'per  mile"  income.  This  method  of  measuring  the 
comparative  costs  of  different  units  of  gross  income  and  the  consequent 
residums  of  net  income  is  employed  by  the  Michigan  statute  and  con- 
sequently the  net  income  principle  is  recognized  says  ex-Railroad  Com- 

*3«R.  R.  Com.  Reports  from  1880-1891. 
*»iSeligman  Essays  in  Taxation,  p.   158. 


28 


MICHIGAN    STATE   LIBRARY. 


missioner  Kich,  who  goes  on  to  explain  "because  a  larger  amount  of 
gross  income  per  mile,  or  a  larger  amount  over  expenses  must  pay  a 
higher  rate  of  taxes."*32 

But  the  thoroughgoing  application  of  this  method  of  discovering  tax- 
ableness  was  not  consistently  followed  in  the  Michigan  plan.  No  exemp- 
tion list  for  example  was  allowed,  and,  although  the  expenses  of  some 
of  the  poorer  roads  was  greater  than  their  earnings,  the  requirement  of 
a  tax  from  all  was  uniformly  enforced.  It  is  in  the  case  of  the  dense 
traffic  roads,  however,  that  the  widest  departure  from  the  established 
method  takes  place.  The  incomes  of  these  roads,  as  has  been  noticed, 
were  grouped  for  the  imposition  of  more  than  one  of  the  terms  in  the 
rate  scale  thus  presuming — if  the  principle  of  measuring  ability  to  pay 
by  net  income  is  rigorously  maintained — the  existence  of  several  grades 
of  expenses  for  the  same  road,  when  of  course,  as  a  matter  of  fact,  the 
''costs"  of  these  roads  were  as  homogeneous  as  were  those  of  the  poorer 
roads. 

A  concrete  illustration  of  the  inequitableness  of  this  method  in  deter- 
mining taxableness  is  found  in  the  case  of  the  two  roads  given  below 
where,  with  relatively  equal  earnings  in  1897,  the  first  road  paid  only  a 
third  more  than  the  second,  though  this  latter  must  operate  more  than 
twice  as  much  road  to  obtain  its  earnings. 


Name. 

Gross  Income. 

Taxes  Paid. 

Milage.  *24 

Grand  Trunk  
Chicago  &  Northwestern  Co  

$2,166,355  26 
2,093,694  60 

$64,254  24 
47,175  13 

224 
521.19 

3.     Productivity  of  .the  Tax. 

The  productiveness  of  a  gross  income  tax  grows  naturally  with  the 
growth  in  gross  receipts  to  the  companies  or  through  an  increase  in  the 
taxing  rate  or  through  some  combination  of  both  these  factors.  In  Michi- 
gan both  the  gross  receipts  and  the  taxing  rate  were  enlarged  during  the 
three  decades  of  this  impost.  The  tax  contributions  from  the  companies, 
when  taken  grossly  (i.  e.,  as  including  contributions  from  new  roads, 
improvements  in  administration,  etc.)  increased  from  an  average  of 
1107,620.5  per  year  during  the  first  half  decade  of  the  impost's  history, 
to  that  of  $1,082,428.8  per  year  during  its  last  five  year  period.  The 
gross  receipts  under  the  same  conditions  and  during  the  same  time  in- 
creased from  $17,876,156  to  $38,276,098  per  year,  showing  a  mere  doub- 
ling in  amount  while  the  growth  in  taxes  as  already  indicated  exhibits 
fully  a  nine-fold  increase. 

Some  explanation  of  this  marked  augmentation  in  the  amount  of  the 
tax  receipts  developed  must  be  found  in  the  periodic  enlargement  of  the 
taxing  rate  which  took  place  during  this  time  although  improved 
efficiency  in  the  administration  of  the  tax  was  also  influential.  The  exact 
effect  of  these  enlargements  of  the  rate  are  not  indeed  measurable  be- 
cause, through  being  a  variable — a  "sliding  scale" — rate,  the  propor- 

*32Sen.    Jour.    1898.      Appendix   p.   36. 


RAILROAD    TAXATION    IN   MICHIGAN.  29 

tions  which  this  rate  itself  should  have,  when  in  actual  application  to 
the  gross  income  of  any  company,  was  dependent  directly  upon  the 
amount  of  this  income. 

The  statutory  scales  of  rates  on  the  other  hand  may  be  easily  compared 
and  a  general  notion  of  their  effectiveness  may  be  possibly  gathered  by 
an  examination  of  these  comparisons.  Enlargements,  it  will  be  noticed, 
of  the  rate  scale  were  the  results  of  heightening  the  individual  rates  in 
each  scale  and?  also,  from  adding  to  the  number  of  rates  which  a  scale 
should  include,  and  changes  of  both  sorts  must  be  compared. 

In  the  law  of  1871  as  low  a  rate  as  one  and  one-half  per  cent  was  levied 
upon  earnings  which  did  not  exceed  three  thousand  dollars  per  mile; 
two  per  cent  upon  surplusage  not  in  excess  of  six  thousand  dollars  per 
mile  and  three  per  cent  for  all  further  surplus.*33  The  lowest  rate  in 
the  law  of  1873  was  two  per  cent  leviable  upon  all  earnings  equal  to 
or  less  than  four  thousand  dollars  per  mile.  Surplusage  in  excess  of 
this  amount  was  amenable  to  a  levy  of  three  per  cent.*34 

Under  the  law  of  1891  no  earnings  were  to  be  levied  upon  with  a 
lower  rate  than  two  per  cent,  while  some  —  namely,  those  from  two  thou- 
sand to  four  thousand  per  mile  —  were  to  pay  two  and  one-half  per  cent. 
For  the  four  thousand  and  more  per  mile  earnings  three  rates  were  made 
by  this  law  of  1891  instead  of  the  single  rate  as  in  the  previous  law. 
Surplus  earnings  over  four  thousand  per  mile,  which  did  not  exceed  six 
thousand  per  mile,  were  levied  upon  with  the  old  rate  of  three  per  cent  ; 
those  in  excess  of  six  thousand  but  not  in  excess  of  eight  were  levied 
upon  with  three  and  one-half  per  cent  while  all  other  surplusage  received 
a  four  per  cent  levy.*35  The  law  of  1897  merely  raised  each  one  of  these 
last  rates  by  half  or  a  quarter  or  by  one  per  cent  so  that  they  ranged 
two  and  one-half,  three  and  one-fourth,  four,  four  and  one-half  and  five 
per  cent  respectively  in  comparison  with  the  rates  of  the  preceding 
law.*36 

The  disparagement  of  being  an  extremely  variable  tax  in  the  amounts 
of  its  proceeds  has  been  widely  affirmed  against  this  tax.  A  study  of 
such  fluctuations  in  the  Michigan  tax  during  a  period  of  eighteen  years, 
when  the  rate  remained  unchanged  and  returns  from  roads  newly  con- 
structed during  this  period  are  disregarded,  may  be  presented  as  follows  : 


of  1871,  p.  354. 

*S4Laws  of   1873,   p.   532. 

•^Laws  of  1891,  p.  217. 

*s8Laws  of  1897,  p.  293. 

NOTE.  —  An  easy  computation  from  the  railroad  commissioner's  reports  shows  that  during 
the  first  three  years  in  which  income  per  mile  is  presented  (1883-4  and  5)  an  income  of  $15.328 
per  mile  developed  a  tax  of  $126.66  while  during  the  last  three  years  of  the  tax  the  same 
amount  of  income  would  develop  a  tax  of  $186.50  per  mile.  This  increase  should  seemingly 
be  attributed  largely  to  the  heightening  of  the  rate  which  had  taken  place  in  the  meantime. 
5 


30 


MICHIGAN    STATE   LIBRARY. 


Amount  of 
railroad 
taxes 
Developed. 

Amount  of 
increase  over 
previous 
year. 

Amount  of 
decrease  over 
previous 
year. 

Per  cent  of 
increase  over 
previous 
year. 

Per  cent  of 
decrease  over 
previous 

year. 

1874 

$175  463  63 

1875  
1876  
1877  
1878  

1879  
1880  
1881  
1882  
1  883 

173,280  60 
165,072  54 
169,764  98 
158,286  53 

175,690  95 
288,032  06 
200,174  92 
385,296  54 

389  847  78 

$4,692  34 

17,404  12 
112,341   41 

i85',12l'54' 
4  551   24 

$2,183  03 
8,208  06 

'ii',578  45 
87,857  14' 

.03 

.11 
.63 

'  '.92'  ' 
11 

.012 

.05 

'  ".07" 
'  '.30* 

1884  

1885  
1886  
1887  
1888  
1889 

281,693  94 

221,727  71 
382,522   56 
418,045  84 
404,699  00 
435  099  16 

'  '  160  ',794'  85 
35,523  38 

30  400   1  6 

108,153  84 
60,171  38 

i3,346'94 

•  •  ;72'  • 
.09 

07i 

.27 

.21 

'  '  '.09' 

1890 

469  314  77 

13*346  94 

'.08 

A  comparison  of  these  receipts  shows  that  there  Avas  more  than  a 
two  fold  increase  in  the  annual  amounts  developed  by  this  tax  during 
the  period  of  eighteen  years  in  question,  but  that  there  was  no  regularity 
in  the  rate  of  increase.  The  fluctuation  upward  from  1881  to  1882  is 
extreme  and  also  another  great  upward  fluctuation  is  found  between 
the  years  1885  and  1886.  An  extreme  downward  fluctuation  occurs  in 
1881,  so  that  the  charge  of  variableness  when  made  against  this  tax 
seems  well  sustained. 

4.     Problems  in  Administration. 

The  administration  of  the  tax  was  for  a  time  placed  in  the  hands  of 
the  auditor  general — the  taxation  law  of  1871  declaring  "every  com- 
pany *  *  *  shall  pay  to  the  state  treasurer  on  the  order  of  the  auditor 
general  an  annual  tax,  etc."  This  latter  official  was  also  to  receive  the 
annual  reports  from  the  companies  and,  in  case  of  neglect  on  their  part 
to  make  report,  or  in  case  of  fraudulent  or  false  ones  was  to  assess  a 
penalty.  The  law  of  1873  provided  for  a  railroad  commissioner,*37  who 
was  to  Veceive  the  reports  and  in  1879  this  official  was  given  the  author- 
ity to  compute  the  railroad  taxes  and  to  enforce  the  penalties  against 
these  companies.*38 

Useful  as  the  data  embodied  in  the  reports  from  the  companies  must 
necessarily  be  to  any  system  of  railroad  taxation  such  data  was  indis- 
pensable to  the  administration  of  the  gross  income  tax  since  an  early 
law  provided  that  the  computation  of  this  tax  "shall  be  based  upon  the 
report  of  each  company."*39  The  reliableness  therefore  of  reports  became 
fundamental  to  this  tax.  The  excise  indeed  seems  to  have  suffered  from 
its  excellencies  since  the  same  dependence  put  upon  these  reports,  which 
commended  this  tax  as  being  inexpensive — "a  self-assessed  tax,"  etc., 
was  also  the  dependence  which  caused  suspicion  that  the  reports  them- 
selves were  dishonest  and  deceptive. 

The    reports    indeed    underwent    radical    changes    in    character    from 

*37Laws  of  1893,  p.  91. 
*3SLaws  of  1879,  p.  41. 
*39Laws  of  1879,  p.  41. 


RAILROAD    TAXATION    IN    MICHIGAN.  31 

time  to  time  as  a  result,  largely,  of  the  increased  importance  which  they 
acquired  through  their  relations  with  this  tax.  By  1879  the  number  of 
separate  topics  upon  which  comment  was  made  in  a  railroad  report  num- 
bered forty-two — a  threefold  increase  in  number  over  the  reports  of  the 
capitalization  tax  period — and  the  additional  privilege  had  been  granted 
the  railroad  commissioner  of  making  any  further  inquiries  "relating 
to  the  duties  of  his  office"  which  he  might  choose  to  ask.*40  The  subject 
matter  of  the  reports  too  had  undergone  a  change  since  the  earlier  period 
because  traffic  from  the  standpoints  of  costs,  income,  quality,  etc.,  in- 
stead of  property  had  now  become  the  subject  of  interest  about  which 
information  was  desired. 

The  question  of  the  reliableness  or  the  unreliableness  of  the  reports, 
though  of  crucial  significance  to  the  justness  of  the  tax,  is  a  question  of 
fact  which  only  the  practical  administrator  is  qualified  to  answer.  The 
conclusions  of  the  railroad  commissioners,  however,  by  whom  the  re- 
ports have  been  received  in  Michigan,  are  so  widely  at  variance  concern- 
ing this  matter  that  they  make  no  certain  reply  to  the  investigator. 

"Sworn  returns  are  by  no  means  infallible,"  says  Commissioner 
Gobb,  "and  the  simplest  computations  contained  in  them  are  found 
to  be  incorrect  to  such  an  extent  that  it  is  unsafe  to  accept  them 
without  verification."*41  Commissioner  Wesselius,  also,  similarly 
declares  "the  earnings  reports  of  many  companies  have  been  very 
unsatisfactory  in  the  past.  In  some  cases  the  (reported)  earnings 
have  been  so  ludicrously  small  that  the  mere  presentation  of  the 
matter  to  the  railroad  companies  has  caused  them  voluntarily  to 
make  some  concessions  to  the  state."*42 

On  the  other  hand  Commissioners  Williams  and  Osborn  assert  the 
fullest  confidence  in  the  veracity  of  the  reports.     Says  the  former, 
"the  power  to  prescribe  the  system  of  accounts  to  be  used  by  our 
railroad  corporations  and  to  investigate  the  books  when  necessary, 
leaves  little  or  no  reason  for  irregualities,"*43  and  the  latter  de- 
clares "the  checks  on  the  reports  of  gross  income  are  so  numerous 
as  to  make  them  accurate  beyond  speculation."*44 
The  statutory  devices  for  insuring  truthfulness  in  the  reports  seem 
to  have  been  of  the  typical  sort,  i.  e.,  the  companies  must  render  reports 
annually,  subject  to  heavy  penalties   for   failure   to    comply    and    their 
methods  of  account  keeping  must  be  prescribed  by  the  commissioner  of 
railroads*45  and  the  latter  official  was  fully  empowered  with  the  usual 
warrant  for  subpoenaing  railroad  officials,  taking  testimony  under  oath 
and  for  securing  access    to    railroad    properties    and    records.*46     The 
hindrances,  therefore,  to  discovering  the  actual  facts  which  the  reports 
from  the  companies  should  make  seem  to  have  been  of  a  practical  sort, 
and,  apparently,  were  fairly  insurmountable. 

"It  will  be  seen  in  the  case  of  interstate  roads,"  says  Commis- 
sioner Wesselius,  "that  some  of  the  earnings  that  properly  belong 
to  this  state  could  be  easily  concealed  in  such  a  manner  as  to  make 
detection  almost  impossible,  and  even  too,  in  the  purely  Michigan 

*4°Laws  of  1873,  p,  93. 
*41R.  R.  Com.  Rep.  1874.  p.  1. 
*42R.  R.  Com.  Rep.  1897,  ~p.  39. 
*43R.  R.  Com.  Rep.  1881.  p.  32. 
*44R.  R.  Com.  Rep.  1900,  p.  14. 
*45Laws  of  1881.  Act  144. 
*4«Laws  of  1873,  p.  93. 


32  MICHIGAN   STATE   LIBRARY. 

roads  concealment  of  part  of  the  earnings  is  comparatively  easy. 
The  scheme  of  railroad  bookkeeping  is  so  elaborate  and  intricate, 
especially  in  the  case  of  interstate  roads,  as  to  preclude  the  possi- 
bility of  making  an  examination  of  the  books  which  would  prove 
of  real  value."*47 

Nothing,  indeed,  would  seem  more  improbable  than  that  commission- 
ers already  burdened  with  the  many  duties  which  pertain  to  their  office 
would  still  be  enabled  to  make  the  detailed  examinations  by  which  the 
accounts  of  the  roads  could  be  verified.  The  administration  of  this  tax, 
too,  does  not  seem,  in  fact,  by  any  means  to  have  been  the  chief  official 
task  which  rested  upon  the  railroad  commissioners.  An  examination 
of  the  annual  reports  made  by  these  officials  shows  that,  until  after  the 
commencement  of  the  "reform"  movement  against  the  tax  in  1897,  not 
more  space  than  a  paragraph  or  at  most  a  page  or  two  was  devoted  to 
questions  concerning  railroad  taxation. 

"Earnings,"  says  the  commissioner  of  1897,  "are  reported  by  the 
railroads  themselves  to  the  commissioner  of  railroads  and  the  latter 
simply  does  the  clerical  work  of  computing  the  tax."*48 
This  fault  of  being  a  self -assessed  tax,  unless  a  remediable  one,  is  with- 
out doubt  a  fatal  defect  in  any  earnings  system  of  taxation  since  no 
government  can  safely  entrust  to   the  taxpayer  the  self-determination 
of  his  payments. 

III.     THE  PUBLIC  ATTITUDE  TOWARD  THE  TAX. 

The  system  of  railroad  taxation  upon  incomes  underwent  marked 
alterations  of  favor  and  disfavor  among  the  people  of  the  state  during 
the  three  decades  of  its  existence.  The  inception  of  the  tax  was  marked 
by  a  thoroughgoing  endorsement  from  a  committee  of  the  National  Asso- 
ciation of  Railroad  Commissioners. 

"Finally,"  says  the  committee  report,  "the  committee  will  say  that 
of  all  the  systems  of  taxation  (railroad  taxation)  examined  by  them, 
those  in  use  in  England,  among  the  countries  of  Europe,  and  in  Mich- 
igan and  Wisconsin  among  the  states  of  the  Union,  seem  to  them 
most  intelligent  and  in  conformity  with  correct  principles.  The 
Michigan  and  Wisconsin  systems  would  seem  to  be  especially  com- 
mendable."*49 

The  approbation  here  expressed  seems  to  have  been  but  slightly  in 
excess  of  that  felt  by  the  public.  The  period  of  the  gross  income  tax 
was  a  period  during  which  taxes  on  incomes  generally  had  experienced 
little  of  the  ebb  in  popularity  which  they  have  since  suffered.  The  Michi- 
gan tax  was  a  levy  upon  the  incomes  of  corporations  and  consequently 
shared  in  the  current  general  approval  which  was  given  to  this  species 
of  imposts.  It  was  uniformly  commended — at  least  until  overtaken  by 
the  "reform"  movement — by  railroad  commissioners,  governors  and  other 
state  officials,  who  had  occasion  to  mention  it,  as  a  system  with  unde- 
niable merits  and  with  few  superiors. 

The  disfavor  on  the  other  hand  to  which  the  tax  succeeded  became 
toward  the  end  fairly  overwhelming.  The  compulsion  which  was  felt 
by  the  members  of  the  first  State  Board  of  Tax  Commissioners  as  de- 


*17R.   R.  Com.  Rep.  1897,  p.  41. 
*48R.    R.    Com.    Rep.    1897,   p.   40. 


9R.  R.  Com.  Rep.  1878.     Report  of  the  Com.  on  Tax.,  National  Association  of  R.  R.  Com. 


RAILROAD    TAXATION    IN   MICHIGAN.  33 

scribed  by  themselves  may  be  taken  as  an  accurate  expression  of  the 
antipathy  of  the  people  of  *the  state  in  the  late  nineties  toward  the  gross 
income  levy. 

"We  are  free  to  admit,"  says  the  first  report  of  the  commissioners, 
"that  these  thoughts  or  conclusions"  (conclusions  upon  the  pro- 
priety of  revising  the  railroad  taxation  laws)  "are  shaded,  if  not 
largely  influenced,  by  the  demands  of  the  people  as  expressed  in 
part  and  with  great  force  in  the  results  of  the  recent  elections. 
Indeed,  we  believe  they  are  so  intensely  aroused  that  they  will  not 
brook,  from  any  official,  interference  with  the  enactment  of  laws 
tending  to  carry  their  desires  into  fruition."*50 

The  explanation  of  this  revulsion  of  feeling  toward  the  tax  is  largely 
found  in  the  financial  panic  of  1893.  The  wide  reaching  business  dis- 
tress which  broke  upon  the  country  during  this  year  reduced  at  once  the 
earnings  of  the  railroads,  and  as  a  consequence — wherever  the  gross  in- 
come tax  was  used — reduced  their  liability  to  taxation.  The  tax  receipts 
from  the  Michigan  roads  during  the  first  two  years  of  this  depression 
were  lessened  by  more  than  a  quarter  of  the  amount  which  had  been  paid 
during  the  last  year  before  the  panic  began — the  actual  amount  of  the 
falling  off  equalling  in  fact  some  $217,625.  This  appreciable  loss  in 
revenues  came,  too,  at  a  time,  unfortunately,  when  a  large  and  increas- 
ing deficit  in  the  state  treasury  turned  public  attention  toward  the  fiscal 
affairs  of  the  commonwealth  and  the  misfortune  of  the  shrinking  rail- 
road taxes  was  in  this  way  emphasized^ 

The  fact  that  the  roads  were  paying  less  taxes  upon  their  valuations 
than  other  property  paid  was  another  telling  condemnation  of  the  im- 
post. The  first  of  Governor  Pingree's  taxation  messages  showed  that 
the  amount  of  taxes  which  was  being  collected  from  these  properties, 
if  taxed  as  property,  would  require  a  taxing  rate  of  only  one-quarter 
of  one  per  cent,  while  other  property  was  burdened  with  a  rate  in  excess 
of  two  per  cent.*51  The  insufficiency  of  the  amounts  drawn  from  the 
roads  had  often  been  suggested  by  railroad  commissioners  and  even  by 
those  who  most  favored  the  gross  income  method,  as  a  system  of  taxation, 
but  it  remained  for  the  "great  appraisal"  of  the  roads,  which  came  near 
the  end  of  the  "reform  agitation,"  to  demonstrate  the  alarming  extent 
of  this  insufficiency. 

The  inadequacy  of  the  receipts  from  the  gross  income  tax  became  ap- 
parent, indeed,  even  to  the  staunchest  friends  of  the  system  long  before 
the  proofs  to  which  reference  has  just  been  made  -were  completed.  But 
this  offense  of  inadequacy,  even  when  it  became  apparent,  was  condoned, 
however,  by  friendly  critics  as  being  a  mere  defect  in  applying  the  tax 
— a  defect  which  could  be  easily  remedied  by  simply  increasing  the  rate. 
On  the  other  hand  the  defectiveness  which  was  shown  in  the  gross  in- 
come tax  by  its  operation  during  "hard  times"  was  a  defectiveness  of 
principle  against  the  evil  of  which  no  remedy  was  easily  apparent. 

*60Rep.   of  Tax  Commissioner  of  1900,   p.   189. 
*81Special  Message  May  6th,   1897,  p.   5. 


34  MICHIGAN    STATE   LIBRARY. 


CHAPTER    THREE. 

THE  PROPERTY  TAX  ON  RAILROADS. 

The  relinquishment  of  the  tax  on  income  after  thirty  years  of  service 
for  one  on  railroad  property  was  a  change  of  such  radical  character  as 
to  merit  at  least  running  explanation.  Further  than  this,  the  reform 
— "equal  taxation  reform,"  as  it  is  called — deserves  description  on  ac- 
count of  certain  by-products  of  which  it  was  the  source  whose  merits 
are  fairly  inestimable. 

The  first  of  these  was  the  origination  of  many  of  the  peculiar  features 
of  the  subsequent  taxing  statute  such  as  the  method  of  rate  determina- 
tion and  the  character  of  the  assessing  board.  Secondly,  the  intelligence 
of  the  public  was  educated  by  the  prolonged  struggle  which  ensued  for 
the  new  method  of  taxation  so  as  to  render  efficient  aid  in  administering 
the  new  tax  after  its  adoption.  Following  the  brief  sketch  of  the  reform 
movement  which  is  here  given,  the  characteristics  of  the  new  tax  will 
be  studied  and  in  a  second  chapter  some  details  of  its  operation  will  be 
noticed. 

«v 

I.     THE  REFORM. 

The  business  depression  which  followed  the  "panic"  period  to  which 
reference  has  just  been  made  was  so  universally  distressful  that  the 
ordinary  state  and  local  tax  levies  were  met  with  difficulty  by  the  people 
and  were  causes  of  wide  spread  complaint.  The  discontent  of  the  Michi- 
gan taxpayers  is  fairly  reflected  in  the  legislature  of  1895  through  the 
action  of  this  body  in  establishing  the  office  of  state  tax  statistician.*1 
The  duties  of  the  occupant  of  this  office  were,  in  general,  similar  to  those 
usually  conferred  upon  the  familiar  advisory  state  tax  commission  whose 
periodic  reappearances  in  the  different  states  bear  eloquent  witness  to 
the  stubbornness  of  the  tax  problem.  It  was  doubtless  due  to  the  at- 
tempt of  the  first  statistician  to  investigate  single-handed  and  at  the 
same  time,  all  the  problems  which  are  usually  assigned  these  commis- 
sions, that  his  efforts  j>roved  so  fruitless  as  was  the  case. 

The  difficulties  of  the  taxpayer  in  meeting  his  obligations,  owing  to 
the  "hard  times,"  were  voluminously  set  forth,  also,  to  the  state  board 
of  equalization  at  its  meeting  in  1896,  by  the  representatives  from  the 
various  counties.  The  report  of  the  board  of  equalization  for  this  year 
may  still  be  read  with  profit  by  those  who  desire  an  insight  into  the 
paralyzing  effects  of  "crises"  upon  industry,  and,  when  proper  allowance 
has  been  made  for  the  customary  exaggerations  of  these  county  repre- 
sentatives, it  still  remains  true  that  tax  payments  would  be  met  with 
real  difficulty.  The  board  at  any  rate  reduced  the  equalized  value  of 
the  property  in  the  state  by  twenty-five  millions  from  what  it  had  been 
in  1891. *2  During  the  same  period  of  years,  too,  the  assessed  valuation 
of  property  had  been  diminished  by  more  than  six  millions.*3 

*1Mich.    Statutes  1895.   p.   597. 

*2Rep.    State    Board    of   Equalization    1896. 

*3Mich.   Manual   1899,  p.   276. 


RAILROAD    TAXATION    IN    MICHIGAN.  35 

Both  the  retiring  and  the  incoming  governors  at  the  end  of  1896,  .de- 
voted large  portions  of  their  messages  to  the  subject  of  taxation.  Gov- 
ernor Rich,  who  had  been  hampered  throughout  both  of  the  two  terms 
of  his  administration  by  large  annual  treasury  deficits,  urged  the  pro- 
priety of  laying  a  general  corporation  tax,  a  franchise  tax,  a  tax  upon 
building  and  loan  associations,  upon  banks  and  mutual  benefit  and  fra- 
ternal organizations,  upon  kerosene  oil  and  upon  salaried  persons — in 
all  no  less  than  six  new  taxes.*4  Governor  Pingree  was  even  more  in- 
sistent upon  tax  reform,  which  should  relieve  the  general  property  tax- 
payer, than  was  his  predecessor,  and,  in  addition  to  those  already  men- 
tioned, his  message  proposed  the  ad  valorem  tax  for  the  public  utility 
corporations  and  the  adoption  of  an  inheritance  tax.*5 

The  legislators  to  whom  these  messages  were  addressed,  grappled 
vigorously  with  the  problem  of  readjusting  the  public  burdens  and  it 
soon  became  evident  that  sacrifices  would  be  demanded  from  the  rail- 
roads, since  within  the"  first  few  weeks  of  the  legislative  session  more 
than  forty  measures  affecting  these  properties  were  proposed.*6  A 
special  message  from  Governor  Pingree  upon  railroad  taxation,  focused 
legislative  interest  upon  this  subject  toward  the  end  of  the  session,*7 
and  gave  a  definite  direction  to  the  search  for  new  sources  of  revenue. 
The  governor  in  brief  in  this  message  urged  that  the  railroads  paid  less 
taxes  in  proportion  to  the  value  of  their  property  than  other  property 
paid,  that  the  gross  income  tax  was  inelastic  and  was  awkward  as  a 
source  of  revenue^during  times  of  business  depression,  that  the  Michigan 
system  was  not  uniform  with  the  systems  found  in  other  states,  and, 
finally,  that  Michigan  received  less  revenue  from  railroads  than  other 
states  secured  from  these  properties. 

The  reform  movement,  which  may  properly  be  considered  to  have  com- 
menced with  this  message,  was  to  involve  consequently  a  change  in  the 
methods  of  taxation  employed  in  this  state  as  well  as  to  develop  more 
equality  in  the  amounts  which  were  paid.  Uniformity  in  methods  of 
taxation  was  to  be  struggled  for  the  message  urged  since  "there  is  but 
one  rule"  (concerning  taxation)  "consistent  with  honesty;  that  rule  is 
to  place  all  property  upon  the  same  footing."  In  the  closing  days  of 
the  session  another  message  was  transmitted  to  the  legislature  contain- 
ing a  lengthy  argument  from  Railroad  Commissioner  Wesselius  in 
veighing  against  the  constitutionality  of  the  gross  income  tax.*8 

No  measure  had  appeared  thus  far,  however,  which  brought  the  rail- 
roads within  the  general  property  tax  and  still  retained  the  centralized 
method  of  administration.  When  a  bill  of  this  sort  was  ready  during 
the  second  year  of  the  Pingree  administration,  a  special  session  of  the 
legislature  was  summoned  and  a  discussion  rarely  given  to  taxation 
measures  in  Michigan  ensued.  Hearings  were  granted  the  railroads  dur- 
ing the  early  days  of  the  session  and  the  attorneys  of  these  properties 
appeared  for  the  purpose  of  instructing  the  legislators  upon  the  views 
of  taxation  held  by  men  connected  with  railroads.  Former  state  gov- 
ernors were  summoned.  One  of  these,  ex-Governor  Rich,  condemned  the 

**T-:x-augural   Message  of  Gov.   Rich   1896.   Sen.   Jour.,   p.   22. 
*5Inaugural   Message   of   Gov.    Pingree  1896,   Sen.   Jour.,   p.   53. 
*8Railroad   Com.   Rep.   1897,   p.   VI. 
*7Special    Mess.    House    Jour.    1897.    p.    2006. 
*8House   Jour.    1897,    p.    2641. 


36  MICHIGAN   STATE   LIBRARY. 

proposed  law  and  defended  the  gross  income  tax  upon  railroads;*9 
another,  ex-Governor  Luce,  declared  that  an  "equalization  of  the  tax  pay- 
ments made  by  railroads  with  those  made  by  other  property  was  an 
equalization  much  needed."*10  One  United  States  senator  communicated 
a  letter  opposing  any  change  in  the  system  of  taxing  railroads;  the  other 
senator  favored  some  equalization  of  these  taxes.*11 

The  preliminary  hearings  on  the  bill  lasted  more  than  two  days,  and, 
since  the  contentions  in  the  legislature  were  mainly  upon  the  form  of 
taxation — all  legislators  being  in  accord  upon  the  justice  of  increasing 
the  payments  from  these  taxables, — the  railroads  stood  alone  in  their 
attitude  of  opposition  to  any  change.  It  was  emphasized  by  their  repre- 
sentatives that  railroads  are  a  peculiar  property — "a  property,"  as  the 
usual  phrase  went  "dedicated  to  the  service  of  the  public,"*12  and  con- 
sequently special  consideration  should  be  shown  them  in  taxation.  Kail- 
roads  in  Michigan  were  described  as  unprofitable  enterprises  owing  to 
high  operating  expenses.*13  Especial  note  was  "made  of  the  provision 
in  the  proposed  law  which  taxed  franchises  and  also  of  the  fact  that  other 
property  was  remiss  in  paying  taxes,*14  and,  finally,  the  existing  system 
of  taxing  railroads  was  warmly  commended  by  all  of  the  railroad  repre- 
sentatives as  possessing  all  the  qualities  of  an  ideal  system.  The  bill 
received  two  days  of  discussion  in  the  House,  and  this  was  fol- 
lowed by  two  more  in  the  Senate.  In  the  former  body  it  received  an 
almost  unanimous  vote — three  ballots  alone  being  cast  against  it,  while 
in  the  latter  body  it  was  defeated  by  the  narrow  margin  of  two  votes. 

The  question  was  now  squarely  before  the  people  of  the  state,  and 
in  the  autumn  campaign  for  the  election  of  state  officers,  "equal  taxation" 
was  endorsed  in  the  platforms  of  both  parties — the  Republican  platform 
specifically  mentioning  the  recently  defeated  measure — "Atkinson  bill" 
as  it  was  now  called — as  being  worthy  of  support.  The  state  grange 
association  and  the  state  farmers'  clubs  representing  the  wishes  of  many 
hundreds  of  farmers  also  adopted  strong  resolutions  of  endorsement  at 
their  annual  autumnal  meetings. 

There  seems,  indeed,  it  may  be  said  parenthetically,  to  have  been  no 
equivocalness  at  any  time  in  the  expressions  of  popular  desire  for  taxa- 
tion reform  in  any  instance  where  public  feeling  upon  this  matter  was 
declared — the  attractiveness  of  the  reform  catch  word  "equal  taxation" 
and  the  customary  unpopularity  of  large  corporations  working  incalcul- 
ably toward  this  end.  The  measure  had  been  petitioned  for  by  more  than 
70,000  signatories,*15  when  before  the  legislature  and  the  constitutional 
amendment,  which  was  submitted  eventually  in  the  year  1900  in  order 
that  the  legislature  might  enact  an  ad  valorem  taxing  law,  was  carried 
by  a  plurality  of  half  a  million — a  plurality  which  was  more  than  twice 
as  large  as  the  total  of  any  previous  vote  upon  a  constitutional  amend- 
ment which  had  been  cast  during  the  previous  history  of  the  state.*16 

The  newly  elected  legislature  of  1899  accepted  at  once  the  duty  of 
enacting  a  reformed  railroad  taxing  law  but  a  controversy  prolonged 

9 Jour,    of    the    Senate    Appen.    1898,    p.    35. 

10Sen.    Jour.   Appen.    1898,   p.    44. 

"Letters   from    Senators   McMillan   and   Burrows,    Det.    Free   Press   Mar.    19,    1898. 

12Meddaugh,    House   Jour.    1898,   Appen.   p.   92. 

13Hanchett,   House  Jour.   1898,  Appen.   p.   49. 

"O'Brien,  House  Jour.   1898,  Appen.  p.  92. 

16ITolmes,    Sen.    Jour.    1898,   p.   189. 

"Mich.   Manual   1901,   p.   307. 


RAILROAD    TAXATION    IN   MICHIGAN.  37 

through  two  months  followed — so  stubborn  was  the  adherence  of  the  gross 
earnings  partisans  to  the  old  tax.  Before  joint  committees  of  the  two 
houses  representatives  from  nearly  all  of  the  important  railroads  for 
the  second  time  urged  their  opposition  to  the  proposed  measure,*17  and, 
as  the  legislative  discussion  continued,  popular  agitation  again,  came  to 
the  assistance  of  the  bill.  The  state  association  of  township  supervis- 
ors,*18 the  state  meeting  of  the  farmers'  institutes*19  and  many  of  the 
county  Republican  judicial  conventions*20  which  were  convened  for  the 
purpose  of  nominating  a  candidate  for  a  supreme  court  judgeship  con- 
tributed resolutions  of  strong  endorsement  for  the  pending  measure. 

The  duration  of  the  new  law  when  finally  enacted*21  and  which  re- 
ceived the  governor's  signature  late  in  March,  was  quite  as  brief  as  its 
enactment  had  been  prolonged.  By  the  end  of  the  following  month  the 
supreme  court  had  declared  the  act  invalid  because  it  was  not  a  specific 
tax  since  property  was  levied  upon  in  accordance  with  value;  neither 
was  it  a  constitutional  property  tax  since  it  violated  the  requirements 
of  uniformity  through  employing  a  state  board  of  assessors  for  assess- 
ment purposes  instead  of  the  local  officials  of  this  sort  who  were  usually 
employed.*22  The  most  persistent  criticism  which  had  followed  the  bill 
during  its  history  was  the  charge  that  it  was  an  unconstitutional  meas- 
ure, and  latterly,  the  firmest  friends  of  the  proposal  having  become  im- 
pressed with  this  charge,  the  governor  himself  brought  the  suit  which 
established  the  invalidity  of  the  law. 

The  opponents  of  reformed  railroad  taxation  it  may  be  said  in  retro- 
spect had  been  rewarded  with  victories  from  time  to  time  during  this 
half  decade  of  taxation  controversy  which  had  materially  delayed  the 
enactment  of  the  new  law.  The  legislative  session  into  which  the  matter 
was  first  introduced,  for  example,  was  rendered  fruitless  so  far  as  the 
enactment  of  an  ad  valorem  taxing  law  is  concerned  by  the  adoption 
of  a  new  gross  income  tax — the  Merriman  law — by  which  the  revenues 
from  the  roads  were  substantially  increased  but  without  the  desired 
adoption  of  a  new  plan  of  taxation.*23  The  enactment  of  the  still  born 
taxation  law,  whose  fate  before  the  supreme  court  has  just  been  de- 
scribed, may  also  be  considered  a  victory  for  those  who  favored  the 
gross  income  tax,  since  it  was  thoroughly  believed  by  those  who  ac- 
quiesced in  the  passage  of  this  measure  that  it  would  prove  unconstitu- 
tional when  adopted. 

Before  the  close  of  the  legislative  session  whose  activities,  as  we  have 
seen,  were  unfruitful  in  procuring  a  constitutional  taxing  law,  the  op- 
ponents to  reform  achieved  still  another  victory — the  establishment  of  a 
tax  commission  which  should  study  tax  conditions  and  report  their  find- 
ings to  some  later  session  of  the  legislature.*24  The  board  thus  provided 
assumed  at  once  the  duties  which  were  prescribed  by  its  organic  law, 
and  the  vigor  and  intelligence  with  which  it  acted  secured  for  it  im- 
mediately a  place  of  respect  in  public  esteem,  and  it  has  since  become 
a  permanent  feature  of  the  state  taxing  system. 

*17Det.   Free  Press  Feb.   24,   1899. 

*"House   Jour.    1899,    p.    252. 

*19Farmers'   Institute  Report  1899. 

*20Det.   Free  Press  Feb.   1899 — See  issue  of  almost  every  day   in  this  month. 

'"Laws  1899,   Act   19. 

*22Pingree    vs.    Aud.    Gen'l.,    Mich.    Rep.    Vol.    120. 

*23Statutes  1897,  p.   293. 

*a*Statutes   1899,    Act   No.    154. 

6 


38  MICHIGAN    STATE   LIBRARY. 

The  contentions  of  those  who  resisted  the  new  plan  shifted  from  time 
to  time,  but  in  the  main  these  antagonists  to  change  in  railroad  taxation 
opposed  the  reform  measures  as  being  unconstitutional,  as  being  a 
menace  to  the  cherished  school  fund,  and,  as  being  undesirable,  through 
necessitating  the  extension  of  the  faulty  general  property  tax  to  new 
taxables.  The  limitation  of  the  new  tax,  too,  to  the  general  law  roads 
was  apparently  condemnable  also  and  proved  a  hindrance  to  reform 
since  no  effective  plan  had  yet  been  proposed  for  doing  away  with  the 
specials  charters.*25 

The  constitutional  amendment  which  had  been  adopted  at  the  autumn 
election  of  1900  removed  all  hindrances  of  a  legal  sort  to  the  enactment 
of  a  tax  on  railroad  property,  but  at  the  regular  session  of  the  legisla- 
ture in  1901,  a  discussion,  continued  throughout  two  months,  was  neces- 
sary before  the  adoption  of  a  new  law  was  secured.  The  measure  had 
been  endorsed  for  the  third  time  in  the  platforms  of  each  of  the  two 
leading  political  parties,  and  both  the  incoming  and  the  retiring  gov- 
ernors had  urged  its  adoption  upon  the  legislature. 

The  struggle  at  this  time  was  not  upon  the  principle  of  reform,  since 
even  the  railroad  attorneys  in  their  renewed  addresses  to  the  legisla- 
tive committees*20  now  advocated  the  property  method  of  railroad 
taxation,  but  upon  the  details  of  the  new  law.  Should  the  proposed  law 
include  telegraph,  telephone,  express,  sleeping  car  and  chair  car  com- 
panies, should  a  separate  board  of  assessors  be  created,  or  should  the 
tax  commission  administer  the  law,  and  how  should  the  rate  be  deter- 
mined were  the  most  troublesome  problems  of  this  sort. 

The  bill  was  finally  drawn  to  exclude  telegraph  and  telephone  and 
sleeping  car  companies  and  to  include  the  others  and  its  administration 
was  to  rest  with  the  Board  of  Tax  Commissioners,  enlarged  to  five  mem- 
bers.*27 A  distinct  compromise  decided  the  method  by  which  the  rate 
—the  average  rate  at  which  other  property  paid  taxes  throughout  the 
state — was  to  be  computed,  since  two  plans  had  divided  the  legislature 
implacably  from  the  first  upon  this  matter.  The  first  plan  provided  that 
the  rate-making  should  be  nothing  more  than  a  mathematical  computa- 
tion— a  mere  division  of  the  total  tax  of  the  state  by  the  valuation  of 
the  property  of  the  state,  the  quotient  standing  as  the  rate  sought. 
The  advocates  of  the  rival  plan  insisted  that  general  property  was  under- 
valued for  taxation  purposes  and  consequently  should  be  "equalized" 
before  serving  as  a  divisor.  No  reconciliation  upon  this  matter  between 
the  opposing  sides  \vas  possible,  seemingly,  and,  eventually,  the  scheme 
was  adopted  of  drafting  into  the  bill  the  words  which  had  been 
used  in  the  recently  adopted  amendment  to  the  constitution,  leaving  it 
to  the  courts  to  determine  the  meaning  of  these  words.  The  bill  which 
had  monopolized  the  interests  of  three  regular  sessions  of  the  legisla- 
ture and  was  the  sole  subject  of  interest  for  four  special  ones,  received 
the  signature  of  Governor  Bliss,  May  2,  1901. *28 

The  taxing  law  following  its  adoption,  underwent  prolonged  adjudi- 
cation in  the  courts.  In  1902  suits  were  brought  in  the  Federal  courts 

*25Sen.   Jour.    1898 ;   pp.    116-124 ;   also   Appen.   pp.   54-59. 

*26Det.   Free    Press    1901,   April   2. 

*27Det.    Free   Press   1901,   Apr.   2nd   to  May   22nd. 

*28Laws   of  1901,   Act   173. 

NOTE. — The  Detroit  Free  Press  of  Dec.  22,  1900,  tabulates  the  expenses  of  the  four  special 
sessions  at  $90,218.33.  Of  course  the  expenses  of  three  regular  sessions  which  were  devoted 
to  this  subject,  the  railroad  appraisal  and  the  long  suit  in  the  federal  courts,  would  add 
materially  to  the  cost  of  this  equal  taxation  legislation. 


RAILROAD    TAXATION    IN    MICHIGAN.  39 

by  twenty-eight  roads  for  the  annulment  of  the  law  on  the  grounds  of 
unconstitutionally,  and  against  the  first  assessment  under  the  law  in 
particular  because  of  the  excessiveness  of  the  amounts  of  taxes  which 
had  been  levied.  The  suits  resulted  adversely  to  the  companies  both  in 
the  decisions  of  the  inferior  and  of  the  Federal  supreme  courts,  and, 
after  a  period  of  not  less  than  eight  years  from  the  time  of  its  inception, 
the  ad  valorem  taxation  of  the  roads  became,  on  June  21,  1905,  the  estab- 
lished law  of  the  state.*29 

The  "equal  taxation"  movement  easily  surpasses  all  others  as  the  fore- 
most political  battle  both  for  intensity  of  interest  and  for  length  of 
duration  of  any  which  the  state  has  ever  experienced.  The  controversy 
is  entitled  to  its  full  share  of  discredit,  too,  on  account  of  the  political 
factiousness  which  it  engendered.  Zealousness  for  proper  railroad  taxa- 
tion seems  indeed  not  infrequently  to  have  been  lost  in  the  clash  of  politi- 
cal combat.  Mainly,  no  doubt,  this  resulted  from  the  greatness  of  the 
interests  involved,  but  to  no  small  extent  the  methods  and  bristling 
personality  of  Governor  Pingree,  the  reform  leader,  augmented  unneces- 
sarily the  real  difficulties  which  lay  in  the  way  of  tax  reform. 


II.     THE  TAXATION  LAW. 

The  new  law  established  the  now  widely  used  method  of  taxing  rail- 
roads— the  modified  general  property  tax — and  was  confessedly  adopted 
from  an  Indiana  statute.  It  was,  like  its  predecessors,  the  sole  tax  on 
railroads,  was  to  be  levied  only  upon  the  railroad  property  actually  in 
use  by  the  road,  and  of  course,  only  upon  the  railroad  property  within 
the  state.  This  property,  by  the  terms  of  the  law,  was  to  be  assessed  at 
its  "true  cash  value"  by  a  "state  board  of  assessors"  and  at  a  "rate"  which 
should  be  the  average  of  the  rates  levied  upon  all  other  property  through- 
out the  state.*3  These  three  provisions  were  the  significant  features 
of  the  new  law  and  each  in  turn  is  deserving  of  comment. 

1.     Assessment  Provisions. 

So  prolonged  had  been  the  struggle  over  the  law  and  so  inclusive  of 
all  fiscal  interests  that  some  of  the  accessories  to  the  new  taxing  method 
had  crept  into  existence  ever  before  the  tax  itself  had  been  adopted. 
Foremost  among  these  was  a  valuation  of  the  railroads — the  foundation 
itself  for  the  new  tax.  Railroad  taxes  having  always  drawn  from  some 
other  source  than  property  in  Michigan,  there  existed  for  taxing  pur- 
poses no  valuation  of  these  properties  of  any  sort.  Few  topics  conse- 
quently had  received  more  discussion  in  the  late  controversy  than  had 
those  concerning  the  probable  worth  of  these  utilities,  and,  derivatively, 
the  relative  burdensomeness  of  railroad  taxation  as  compared  with  the 
burdens  borne  by  other  property  of  similar  value.  It  was  for  the  solu- 
tion of  this  last  problem  that  the  state  was  moved  at  last  to  employ  a 
staff  of  experts  to  compute  or  appraise  in  the  most  thorough  manner 
possible  the  value  of  the  railroad  property  within  its  limits. 

This  now  most  famous  of  railroad  valuations  is  known  as  the  "Michi- 
gan railroad  appraisal"  and  its  methods  have  been  adopted  by  other 

*29Sec  138  Fed.  Pep.  p.  223  for  decision  of  District  Judge  Wanty  ;  207,  U.   S.  Rep.  for  de- 
cision   of  Justice   Brewer. 
*30Laws  1901,  Act  173. 


40  MICHIGAN   STATE  LIBRARY. 

states  and  approved  by  the  congressional  industrial  commission  of 
1900,*31  by  the  interstate  commerce  commission*32  and  by  numerous 
text-book  writers.*33 

The  chosen  plan  of  valuation,  which  received  the  distinction  just 
indicated,  involved  a  complete  inventory  of  the.  material  or  physical  ele- 
ments in  a  railroad,  that  its  reproduction  worth  physically  might  be 
determined.  This  was  supplemented  by  the  value  of  its  franchises  and 
good  will,  "or  the  whole  of  that  immaterial  non-physical  worth  which  is 
sometimes  known  as  corporate  excess."*34  This  last  was  a  capitaliza- 
tion of  a  residuum  of  average  earnings  after  the  portion  earned  by  the 
physical  investment,  taxes,  operation  expenses,  etc.,  had  been  deducted, 
and  it  is  doubtless  the  use  of  such  an  inventory  and  the  employment  of 
earnings  in  determining  corporate  excess  which  constitute  the  chief 
merits  of  the  plan. 

Any  attempt  at  an  adequate  review  of  this  appraisal  would  exceed  the 
scope  of  this  discussion  but  it  may  not  be  wholly  amiss  to  notice  two 
services  at  least  which  it  has  rendered  to  the  people  of  the  state  beyond 
those  contemplated  by  its  authors. 

First,  It  was  relied  upon  by  the  state,  corrected  to  date,  as  defense 
from  the  charge  of  over-assessing  railroads  in  the  Michigan  tax  cases 
before  the  Federal  courts  in  1902.*35 

Second,  In  a  remarkably  low  valuation  of  railroads  by  the  board  of 
assessors  in  1906,  the  attorney  general  of  the  state  had  the  appraisal 
developed  to  date  as  a  means  of  publicly  convincing  the  assessing  board 
of  its  error  in  valuation.*36  Michigan  apparently,  therefore,  is  fortunate 
in  having  a  standard  which  may  be  resorted  to  as  a  touchstone  when 
railroad  valuations  are  in  doubt. 

Notwithstanding  the  possession  of  this  costly  appraisal  or  the 
reputableness  of  its  methods,  no  influence  from  it  is  discernible  in  the 
assessment  provisions  of  the  new  law.  The  framers  of  the  law  refrained, 
indeed,  from  designating  any  method  of  valuation  as  the  chosen  method 
for  assessment  purposes  and  catholicly  made  room  for  the  use  of  any 
or  all  plans  which  might  be  devised.  Processes,  in  fact,  as  yet  unde- 
veloped are  not  denied  the  use  of  the  assessing  board  by  the  provisions 
of  the  law  since  "such  other  evidence  as  may  be  obtainable  bearing 
thereon"  (on  railroad  values)  is  within  its  competency  to  employ.  The 
liberality  here  shown  has  the  approval  of  custom  in  other  states  and 
the  endorsement  of  assessing  boards  generally  though  a  latitude  of  such 
large  proportions  is  markedly  in  contrast  in  Michigan  with  the  statutory 
restrictions  upon  the  ascertainment  of  "cash  value"  by  the  assessors  of 
ordinary  property. 

The  struggle  for  a  more  vigorous  taxation  of  railroads  could  make  but 
little  headway  anywhere  without  discovering  so  vulnerable  an  asset  as 
the  corporate  franchise  and  the  wide  remove  of  Michigan  from  the  fiscal 
needs  and  methods  of  older  states  is  suggested  by  the  fact  that  no  earlier 
appearance  of  the  term  "franchise"  in  a  taxing  statute  in  this  state  is 
anywhere  to  be  found.  Indeed,  this  much  used  source  of  revenue  in 


*31Rep.   Indus.   Com.   1902,  Vol.   XIX,  p.   55. 

*82Rep.   Inter.   State  Com.   Com.   1903,  p.   29. 

*33Am.  R.  R.  Transportation,  Johnson,  p.  43. 

*3*Bulletin  21   U.   S.   Dept.   of  Com.   and  Labor    (1904),   p.   76. 

*3cRecords   and   Briefs,    Mich.    Tax   Cases,   Vol.    49. 

*36Detroit  Free  Press  1905,  Jan.  22. 


RAILROAD    TAXATION    IN   MICHIGAN.  41 

older  states  had  had  but  one  official  mention  as  a  taxable  in  this  common- 
wealth prior  to  its  appearance  in  the  tax  reform  statute.*3 

Belated  as  it  was,  the  proposal  to  tax  railroad  franchises  met  with 
strong  opposition  in  the  legislature  and  the  provision  concerning  this 
project  was  easily  excluded  by  amendment  from  the  first  draft  of  the 
new  law.  Besides  its  novelty,  the  ambiguity  of  the  term  "franchise" 
was  the  chief  defect  to  which  the  legislators  objected,  including  as  it 
does  such  separate  notions  as  corporate  "being  and  doing,"  "good  will," 
and  "corporate  excess,"  and,  though  indeed  included  finally  within  the 
taxing  statute,  "said  franchises  (were)  not  to  be  directly  assessed  but 
(were)  to  be  taken  into  consideration  in  determining  the  value  of  other 
property."*38 

Faultless  in  truth  as  is  the  taxation  of  railroad  franchises  as  a 
matter  of  principle,  as  much  may  not  be  said  for  their  assessment 
unseparated  from  other  railroad  property,  and  for  at  least  two  reasons. 
First,  unseparated  taxation  of  franchises  prevents  a  desirable  clearness 
to  the  taxpayer  as  to  the  exact  property  elements  upon  which  he  pays 
taxes  and  there  is  no  administrative  difficulty  which  compels  such  con- 
cealment since  the  direct  franchise  tax  is  already  widely  used  in  several 
states.  Second,  with  the  growing  use  of  this  tax  in  other  states  pro- 
claiming it  a  desirable  source  of  revenue  the  opportunity  was  seemingly 
lost  here  of  establishing  the  tax  on  a  sound  basis  for  further  growth  in 
Michigan.  It  is  indeed  not  clear  what  purpose  was  served  by  the  statute 
in  mentioning  a  taxable  as  subject  to  assessment  only  immediately  again 
to  fuse  it  into  another  taxable  of  which  it  was  already  a  recognized  part. 

The  strictly  administrative  needs  of  the  new  law  in  its  assessment 
p revisions  are  apparently  well  satisfied  through  the  empowerment  of 
the  assessing  board  with  the  customary  prerogatives  of  subpoena,  re- 
quirement of  reports,  and  access  to  public  records  and  documents.  The 
assessment  was  to  be  spread  upon  a  tax  roll  with  the  usual  privileges 
of  review  accorded  to  the  railroads.  "Wilfull  assessments"  the  law  pro- 
vides, finally,  in  serio-comic  style,  "at  more  or  less  than  what  the  mem- 
bers taking  part  in  making  the  assessment  believe  to  be  true  cash  value" 
is  a  misdemeanor  severely  punishable  upon  conviction. 

2.     The  Tax  Rate. 

The  listing  of  railroad  property  upon  the  assessment  roll — the  first 
goal  of  the  reformers — was  now  provided  for  along  eminently  regular  and 
conservative  lines — the  tax  to  be  imposed  is  next  considered.*39  "Equal 
taxation"  meant  nothing  to  the  partisans  of  the  new  law  if  not  the  im- 
position of  the  same  tax  rate  upon  railroads  that  other  property  bore — 
"a  tax  rate  which  should  be  the  average  rate,"  as  the  formalized  ex- 
pression ran,  "of  all  the  taxes  levied  throughout  the  state."  The  "average 
rate"  idea  sprang  naturally  from  the  circumstances  of  the  reform 
agitation  but  no  similar  spontaneity  attended  its  issue  into  practical 
form  as  the  long  controversy  upon  rate  constituents  which  ensued 
abundantly  shows. 

The  name  itself  had  long  been  used  in  the  tax  laws  of  Michigan  to 
designate  the  rate  levied  upon  telegraph  and  telephone  properties,  and 

*37^x-augin-al    Mess.    Gov.    Rich    1896. 
*38T,aws  of  1901,   Act   173. 
*OTLaws   1901,   Act   173. 


42  MICHIGAN   STATE   LIBRARY. 

consequently  was  not  unfamiliar  to  the  readers  of  the  state  reports.  The 
connotations  though  of  the  term  in  its  earlier  and  in  its  later  use  are 
so  different  that  little  more  than  the  name  alone  may  be  regarded  as 
derived.*40 

For  the  new  average  rate  "the  said  state  board  of  assessors,"  so  the 
statute  of  1901  commands,  "shall  ascertain  and  determine  the  average 
rate  of  taxation  for  the  then  current  year  levied  upon  other  property 
upon  which  ad  valorem  taxes  are  assessed  for  state,  county,  township, 
school  and  municipal  purposes."  And  to  the  furthering  of  this  end  the 
requirements  continued  "the  county  clerk  in  each  county  *  *  *  the 
assessing  officers  of  cities  and  villages,  shall  report  the  amount  of  tases 
to  be  raised  in  such  municipalities  *  *  *  and  the  aggregate  valua- 
tion of  property  as  taken  from  the  assessment  rolls." 

An  unusual  and  complex  tax  rate,  such  as  one  must  be,  which  is  com- 
puted after  this  fashion,  is  easily  assailable,  and  the  one  in  question  was 
speedily  attacked,  both  as  to  its  equitableness  and  as  to  its  legality. 
Concerning  this  latter  vulnerableness,  though  of  vast  importance  to  the 
act  itself  "since  the  first  and  principal  matter  of  attack"  declared  the 
Federal  supreme  court  in  adjudicating  the  measure  "is  the  average 
rate,"*41  yet  further  than  to  note  that  questions  of  credit,  exemptions, 
rehearings,  equalizations  and  taxing  authority  formed  the  basis  of  the 
legal  attack,  extended  comment  in  this  direction  seems  unimportant  to 
this  discussion  since  the  alleged  imperfections  were  largely  of  a  strictly 
legal  and  technical  character. 

The  equitableness  of  the  "average  rate,"  however,  was  condemned, 
mainly,  because  in  computing  it  different  taxing  jurisdiction  were  seem- 
ingly confused  together  thus  depriving  the  railroads  of  the  customary 
situs  benefits  enjoyed  by  other  forms  of  property.  Kailroads  amenable 
to  such  a  rate  were  apparently  additionally  burdened  by  every 
increased  tax  levy  in  any  of  the  taxing  areas  of  the  state,  though, 
through  having  their  residence  elsewhere,  they  might  share  in  none 
of  the  benefits  which  resulted  from  these  increased  levies.  A  con- 
troversy which  had  many  of  the  characteristics  of  the  famous  one 
between  nominalists  and  realists  in  their  medieval  philosophy  followed 
—friends  of  the  law  claiming  that  the  data  from  the  assessment  districts 
furnished  only  a  convenient  reference  material  for  the  computation  of 
a  rate;  the  opponents  to  the  measure  asserting  that  this  data  was  final 
and  determinative.*42 

The  grievances  arising  from  conflicting  tax  jurisdictions,  claimed  here, 
seem  indeed,  upon  inspection,  to  have  been  more  imaginary  than  real, 
since  certainly  no  taxing  area  would  permit  the  overtaxation  of  itself 
for  the  purpose  of  adding  to  the  burdens  of  railroads,  while  on  the  other 
hand  a  normal  increase  in  any  taxing  district  would  affect  scarcely  per- 
ceptibly any  "average  rate."  The  peculiar  nature  of  railroad  property, 
too,  seems  to  make  it  a  property  whose  interests  far  exceed  the  bound- 
aries of  the  local  taxing  area,  and  therefore  justifies  a  broadened  amen- 
ableness  to  taxation. 

On  the  other  hand  the  uncertain  meaning  of  "aggregate  valuation  of 

*40Laws  1881,  Act  168. 

*«Mich.    Tax   Cases,   207   TT.    S.    Rep.,   p.   293. 

M2This  matter  is  discussed  very  fully  in  House  Jour.  1899,  Vol.  Ill,  appendix.  In  133 
Mich  Rep.,  p.  121  and  in  the  Opinion  of  Att'y  Gen.  Oren  upon  "rate  determination"  Tax 
Commissioner's  Rep.  1903-4,  p.  37. 


RAILROAD    TAXATION    IN    MICHIGAN. 


43 


property" — the  property  valuation  which  should  be  divided  into  the  sum 
total  of  taxes  to  produce  the  "average  rate" — gave  an  opportunity 
for  injustice  to  the  railroads  through  the  "average  rate"  which  could 
not  be  doubted.  Did  the  phrase  "aggregate  valuation  of  property"  mean 
"property"  at  its  assessed  value,  its  real  value,  or  since  Michigan  has 
a  board  of  equalization,  its  equalized  value?  The  answer  which  might 
be  made  to  this  inquiry  was  indeed  of  no  slight  concern  to  the  railroads 
as  the  subjoined  table  of  opportunities  and  results,  which  the  first  assess- 
ment— that  of  1902 — developed,  concerning  this  matter  of  valuations 
plainly  shows: 


Million?. 

Average  Rate. 

Resulting  Tax 
Levy. 

Real   Valuation  of  General  P-operty  (as  de- 
termined hy  Board  of  As-e-sors)  
Acse    ed  Valuation  
Equalized  Valuation  

1715 
1418 
1578 

.014 
.01.7 
.015 

$2,780,000 
3,556.000 
2  ,978  ,000 

The  wide  famed  disparity  between  the  assessed  valuation  of  property 
and  its  real  value — a  fame  as  wide  extended  as  is  the  use  of  the  property 
tax  itself — proved  no  small  hindrance  in  fact  to  the  adoption  of  any 
ad  valorem  railroad  taxation  measure,  whatsoever,  largely  through  the 
vital  dependence  of  the  "average  rate"  upon  some  one  or  another  of  these 
valuations.  The  weightiness  of  the  difficulty  is  only  feebly  reflected  by 
the  vacillations  in  choice  of  valuations  which  are  presented  by  the  differ- 
ent ad  valorem  tax  laws  which  were  perfected  or  enacted,  although  the 
existence  of  legislative  uncertainty  upon  the  matter  is  at  least  clearly 
shown  by  the  display.  Briefly  summarized  the  first  bill  introduced — 
the  "Atkinson  bill" — made  use  of  the  "equalized"  valuation  in  develop- 
ing the  rate;*43  the  law  which  was  declared  unconstitutional  used  the 
"equalized"  valuation  plus  a  correction  through  the  addition  of  rail- 
road property;*44  the  final  measure,  as  passed  upon  by  the  courts  used 
"assessed  valuations"*45  while  the  first  amendment  to  the  taxing  statute 
which  was  adopted  provided  that  a  "real"  valuation  should  be  em- 
ployed.*46 

The  clew  to  such  radically  different  alterations  as  these  is  found  in 
the  desire  of  the  lawmakers  to  balance  the  taxation  of  fully  valued  rail- 
road property  with  that  of  undervalued  general  property  through 
changes  in  the  rate.  All  equalization  schemes  of  this  sort,  however, 
were  ultimately  ruled  against  by  the  courts,  and.  although  the  balancing 
of  the  tax  burdens  upon  the  two  kinds  of  property  by  changes  in  this 
factor  still  has  many  advocates,  further  comment  upon  the  rate  and 
its  problems  seems  unprofitable  until  its  practical  operations  and  those 
of  equalization  have  been  studied. 

Whatever  may  be  the  merits  of  the  "average  rate"  in  comparison  with 
other  rates  las  the  arbitrary  rate  for  example) — and  it  is  one  which 
has  come  into  use  in  several  states  since  its  adoption  by  Michigan — 

*«Sen.    Jour.    1898,   p.    23. 

*"Laws   1899,   Act   19. 

*45Laws   1901.   Act   173. 

*wLaws   1905,  Act  282. 

NOTE. — In  the  final  enactment  of  the  taxing  law — the  constitutional  one — the  legislature 
frankly  confessed  its  inability  to  decide  between  the  competing  "valuations."  Ultimately  it 
drafted  into  the  statute  terms  identical  with  those  in  the  constitutional  amendment  and 
committed  the  choice  to  the  courts 


44  MICHIGAN    STATE   LIBRARY. 

its  employment  in  this  state  is  strictly  circumscribed  since  by  the  con- 
stitutional amendment,  which  authorized  the  ad  valorem  system  of  taxa- 
tion, only  property  assessed  by  a  state  board  of  assessors  is  taxable  with 
this  rate.*47 

8.     Tlie  Board  of  Assessors. 

The  state  board  of  assessors,  composed  ex  offteia  of  the  state  tax  com- 
missioners, to  whom  the  administration  of  the  new  law  was  intrusted 
numbered  at  first  five  members,  appointed  each  for  a  term  of  six  years, 
but  with  differing  dates  of  retirement  so  that  inexperienced  men  might 
never  wholly  make  up  its  membership.  The  board  was  without  pre- 
cedent in  Michigan,  and  .in  the  legislative  debates  upon  the  original  ad 
valorem  taxing  measure,  it  was  strongly  urged  that  its  members-hip 
should  be  composed  of  certain  state  officials.  This,  together  with  the 
amendment  that  the  board  should  be  elective,  added  by  the  senate  to 
the  original  Atkinson  bill,  was  rejected  in  the  final  law  which  provided 
for  a  special  board  to  be  appointed  by  the  governor. 

So  infrequent  were  the  occasions  for  assessing  railroads  that,  through 
motives  of  economy,  this  duty  was  assigned  the  state  board  of  tax  com- 
missioners though  the  earlier  unconstitutional  law  had  provided  for  a 
highly  paid  board  wrhose  sole  function  should  be  the  administration  of 
this  law.  With  the  annulment  of  the  chief  duties  of  this  board  as  tax 
commissioners  in  1905,  the  membership  was  reduced  to  three  whose  chief 
concern  is  the  administration  of  the  railroad  tax.*48  The  curtailment 
here  imposed  by  circumstances1  was  not  at  all  out  of  harmony  with  good 
policy,  since  under  normal  conditions,  the  board  is  open  to  public  opinion 
for  direction  and  control  and  the  much  greater  amenability  of  the  small 
board  as  compared  with  the  large  one  to  such  control  is  wrell  known. 
Among  the  minor  duties  of  the  board  none  are  so  important  as  that 
of  maintaining  a  permanent  office  at  the  seat  of  government. 

**7Mich.    Manual    1901,    p.    47. 

NOTE. — The  Governor  is  now  a  member  of  this  board.     See  Laws  of  1909,  p.  78. 

**8Laws   1905,  Act  281. 


RAILROAD    TAXATION    IN    MICHIGAN.  45 


CHAPTER   FOUR. 

THE  OPERATION  OF  THE  PROPERTY  TAX. 

The  administration  of  the  tax  centers  about  the  two  processes  of 
assessment  and  of  rate  determination  and,  following  a  brief  description 
of  each  of  these,  some  notice  will  be  given  to  results. 

I.     THE  ASSESSMENT  PROCESS. 

The  assessment  of  railroads  though  serving  the  same  end  as  the  assess- 
ment of  other  property  benefits  but  little  from  the  methods  used  in  valu- 
ing ordinary  property  for  taxing  purposes.  None  of  the  familiar  indices, 
for  example,  which  the  local  assessor  employs  in  order  to  value  taxables 
such  as  probated  or  selling  values  of  property,  the  price  which  a  prop- 
erty owner  will  take  or  some  possible  purchaser  will  offer,  are  available 
for  assessing  railroads,  since  these  properties  are  never  probated,  are 
seldom  sold  as  entireties,  nor  offered  nor  bi'd  for  upon  the  market.  For 
similar  reasons  even  the  tests  of  "cash  value"  which  are  the  legal  guides 
to  ordinary  assessments,  such  as  "what  a  property  will  sell  for  at  other 
than  a  forced  sale"  or  what  a  property  would  be  valued  at  in  settlement 
of  a  just  debt  due  from  a  solvent  debtor"  are  not  practicable  tests  in  the 
assessment  of  railroads. 

In  addition  to  the  absence  of  a  market  price  a  railroad  involves  so 
much  wealth  in  its  roadway  and  equipments  that  any  assessment  to 
secure  credence  must  usually  rest  upon  well  known  data,  such  as  value 
of  securities,  costs,  earnings,  etc.  The  assessments  of  railroads,  there- 
fore, are  computed  or  synthesized  assessments  and  are  always-  spoken 
of  as  following  some  "method"  or  "plan." 

Not  a  little  of  the  "plan"  or  "method"  which  the  Michigan  board  of 
assessors  used  in  putting  together  its  assessments  may  be  inferentially 
gathered  from  its  biennial  reports.*1  A  more  intimate  view  of  its  pro- 
cesses, however,  may  be  had  from  the  testimony  of  board  members  them- 
selves when  upon  the  witness  stand  in  the  "Michigan  tax  cases"  where 
the  character  of  the  first  assessment  for  levying  the  railroad  tax  was 
involved. 

The  board  neglected  nothing,  seemingly,  as  gathered  from  these  re- 
ports, in  preparing  itself  for  this  fundamental  assessment  process. 

"Detailed  facts  with  regard  to  the  assessment  and  valuation  of 
railroad  property  throughout  the  various  states  of  the  Union  has 
been  gathered,"  so  the  reports  assert,  "no  less  than  thirty  different 
states  having  furnished  this  board  with  the  results  of  their  work  in 
this  direction."  "Correspondence  with  the  United  States  census 
department,  as  well  as  the  interstate  commerce  commission,  and 
material  assistance  rendered  by  the  office  of  the  secretary  of  state 
and  railroad  commissioner  of  Michigan  have  served  to  increase  the 

'"Reports  of  State  Board  of  Tax  Commissioners — Assessors  1900,  pp.  63-70,  128,  139,  and 
143-182;  1902,  p.  50-70.;  19034,  p.  30-53;  1905-6,  p.  18*44. 

7 


46  MICHIGAN   STATE   LIBRARY. 

knowledge  of  the  subject  to  no  small  extent."  "The  entire  set  of 
results" — results  of  the  Michigan  railroad  appraisal  consisting  of 
thirty-three  typewritten  volumes  of  data  and  correspondence  "now 
exists  in  the  office  of  the  tax  commissioner  and  has  formed  one  of 
the  most  important  parts  of  the  basis  of  valuation  used  by  the 
board."  "Much  valuable  correspondence  with  the  railroad  compa- 
nies, as  well  as  the  results  of  individual  research  was  transmitted 
by  Prof.  Adams  to  this  office."  "The  results  obtained  by  ex-Com- 
missioner Robert  Oakman  in  his  capitalization  of  railroad  net  earn- 
ings form  another  part  of  the  investigation  carried  on  during  the 
progress  of  the  Michigan  railroad  appraisal  as  does  the  study  of 
the  stocks  and  bonds  of  the  companies  as  pursued  by  ex-Commis- 
sioner Campbell."  Finally,  reports  were  secured  from  the  railroads 
which  embodied  "practically  the  whole  blank  form  prescribed  by 
the  Federal  interstate  commerce  commission."*2 

And  from  the  "railroad  tax  cases"  we  have  the  testimony  of  the  official 
engineer  of  the  board,  who  "attended  every  meeting  of  the  board  save 
the  final  two"  and  "whose  duties  included  advising  the  board  in  an  ex- 
pert capacity  of  the  values  of  properties  under  consideration,"  that  the 
board  "gave  consideration  to  the  stock  and  bond  plan,  capitalization  of 
earnings  and  to  appraisal  supplemented  by  capitalization  of  surplus." 
"They  considered  many  different  plans,  the  history  of  the  different 
properties,  and  other  considerations  which  had  a  bearing  on  valuation."* 
The  testimony  of  this  engineer  supplements  that  of  the  board  members 
in  these  cases,  where  the  state  undertook  to  show  that  the  railroads  had 
been  under-valued  by  the  board  of  assessors,  and  conjointly,  the  testi- 
mony of  the  two  is  as  follows:  The  members  of  the  board  in  the  first 
assessment  were  able  to  classify  themselves  into  the  "high  men"  and 
the  "low  men" — a  difference  of  more  than  twenty  millions  standing 
between  the  minimum  at  which  the  former  would  assess  the  roads  and 
the  maximum  of  the  latter.  By  argument  and  discussion  this  difference 
gradually  disappeared,  so  it  was  testified,  and  by  some  accommodation 
of  views  an  assessment  which  was  tolerable  to  all  was  arrived  at.*4 

The  meetings  of  the  board  developed  strong  feeling  among  its  members, 
since  twice  at  least,  according  to  the  court  records,  threatening  language 
was  used  by  commissioners  against  their  associates.*5  They  also  de- 
veloped discussions  not  strictly  pertinent  to  railroad  assessments  such 
as  the  probable  amount  the  railroads  would  stand  without  contesting 
the  tax  in  the  courts.  All  the  commissioners  who  testified  remembered 
comments  on  this  matter  among  members  of  the  board.*6 

The  board  also  gave  consideration  to  the  propriety  of  assessing  rail- 
roads at  the  percentage  of  cash  value  at  which  it  was  thought  other 
property  in  the  state  w^as  assessed,  but  this  species  of  equalization  be- 
tween railroad  and  other  property  was  speedily  abandoned.  In  short, 
the  testimony  develops  the  conclusion  that  personality  counted  for  much 
in  the  board  meetings  and  that  mere  argument  was  a  main  factor  in 
determining  the  assessments. 

A  review  of  the  assessment  roll  thus  prepared  was  still  to  be  made 

2Tax    Comm.    Rep.    1902,    p.    52-57. 

Abstracts  and   Records  "Mich.   Tax  Cases,"   Vol.   Ill,  p.   1203. 

'Abstracts   and    Records   "Mich.    Tax    Cases,"    Vol.    Ill,    p.    1295. 

5Abs'racts  and  Records,  Vol.  Ill,  p.   1198. 

"Abstracts   and   Records,   Vol.   Ill,   p.   1196. 


RAILROAD    TAXATION    IN   MICHIGAN.  47 

and  the  railroads  almost  without  exception  appeared  before  the  board 
in  opposition  to  the  amounts  assessed  against  them.  The  transcripts 
of  the  protests  listened  to  by  the  board  from  the  railroad  representatives 
shows  the  use  of  almost  every  argument  conceivable  to  the  railroad  mind. 
One  is  an  attempt  to  alarm  the  board  through  the  statement  that  the 
president  of  the  largest  railroad  system  in  the  state  spoke  of  resigning 
when  the  amount  of  the  assessor's  appraisal  was  brought  to  him.*7 
Again  the  veriest  detail  of  the  board's  appraisal  is  found  fault  with. 
The  efforts  of  the  roads  were  rewarded,  however,  since  more  than  eight 
millions  was  subtracted  from  the  original  assessment. 

The  earlier  railroad  appraisal — Michigan  appraisal  of  1901 — was  in 
the  hands  of  the  board  and  celebrated  as  it  was  abroad  and  enjoying 
public  confidence  as  it  did  at  home  this  appraisal  might  not  unreasonably 
be  thought  to  have  influenced  the  assessment.  Incidental  suggestion  of 
this  is  indeed  found  in  the  close  similarity  in  amounts  between  the 
board's  assessment  and  the  appraisal,  but  the  search  is  a  fruitless  one 
in  the  utterances  of  the  board  for  any  acknowledgment  that  the  appraisal 
was  of  exceptional  usefulness. 

The  resort  to  an  arbitrary  assessment  like  the  one  described,  where 
final  judgment  results  merely  from  merging  individual  ones,  was  a  wide 
remove  from  the  original  conception»of  the  assessing  process  which  the 
board  had  held. 

"A  systematic,  complete  and  fair  valuation  of  the  railroad  prop- 
erties of  Michigan  at  this  time"  their  first  report  narrates — and  the 
hope  expressed  here  seems  fairly  representative  of  a  current  popular 
one — aif  put  into  shape  for  reference  would  obviate  the  necessity 
for  another  complete  valuation  for  many  years."    "If  railroads  are 
to  be  assessed  upon  valuations,  only  men  capable  of  doing  this  work 
by  training  and  experience,  can  find  even  approximate  valuations, 
and  this  should  be  done  so  openly  that  not  the  faintest  suspicion 
may  attach  to  the  assessing  board  nor    to  the  corporations  them- 
selves.   Any  private  office  valuation  would  lead  to  grave  charges."*8 
The  unexceptionable  program  here  sketched  was  wholly  discarded,  as 
we  have  seen,  by  the  board  when  confronted  two  years  later  with  an 
actual  assessment. 

"Though  the  general  trend  of  thought,"  says  their  report  at  this 
later  time,  "among  all  who  have  written  upon  this  subject" — the 
assessment  of  railroads — "is  in  the  direction  of  some  one  plan  or 
method  sweepingly  applied  to  the  entire  list  of  railroads,  within  a 
state.  *  *  *  It  is  the  opinion  of  this  board  that  no  one  plan 
may  be  arbitrarily  applied  but  that  each  individual  property  should 
be  subjected  to  an  examination  covering  every  possible  phase  of  the 
question.*9 

The  choice  on  the  part  of  the  board  to  use  a  "private  office,"  secretive 
or  arbitrary  judgment  method  of  valuation  instead  of  the  one  which  has 
just  been  outlined  may  be  explained  as  the  choice  which  would  meet 
with  the  least  resistance.  None  of  the  several  methods  of  appraising 
railroads,  which  have  found  a  place  in  the  practices  of  tax  commission- 
ers though  logically  satisfactory  and  of  wide  practical  use,  have  any- 
where had  full  legislative  or  judicial  approval  so  that  the  sweeping  ap- 


*7Pond,   Hearings  before  the  Board  of  Assessors   1903,   p.   154. 
*8Report  of  Tax  Com.   1900,  p.  64. 
*»Rep.  of  Tax  Com.  1902,  p.  57. 


48  MICHIGAN   STATE   LIBRARY. 

plication  of  any  one  of  them  by  the  Michigan  board  would  have  been 
wholly  experimental.  A  way  mark  in  railroad  taxation  was  indeed  of 
possible  attainment  to  this  board  through  using  and  thereby  bringing 
to  legal  test  some  one  of  these  methods.  Progress  of  this  sort  would 
truly  have  been  valuable  to  the  theory  of  taxation,  but  it  would  have 
been  gained  in  the  instance  of  the  case  under  discussion  at  the  risk  of 
vitiating  the  assessment  and  of  prejudicing  public  opinion  against  a 
taxing  law  not  yet  firmly  established. 

The  administrative  processes  of  the  single-plan-publicly-computed 
method  of  assessment,  too,  must  have  proven  incomparably  more  diffi- 
cult than  were  those  of  the  secretive  method.  Not  only  would  the  plan 
chosen  need  establishment  in  the  confidence  of  the  public  but  in  its  ap- 
plication it  could  be  attacked  by  the  roads  in  detail  and  the  particu- 
larized defense  of  each  item  in  a  railroad  assessment  is  not  a  task  lightly 
assumed.  Legal  and  administrative  tasks  like  the  ones  here  suggested 
were  not  imposed  upon  the  board  by  the  taxing  law  and  little  doubt 
remains  that  the  use  of  the  secretive, — arbitrary-judgment — species  of 
assessment  deserves  thorough  commendation. 

The  personnel  of  the  board  which  should  have  such  large  responsi- 
bilities in  charge  as  the  valuing  of  railroads  was  given  extensive  con- 
sideration when  the  change  to  the^ad  valorem  system  of  taxation  was 
first  proposed,  and  it  is  a  subject  which  is  still  full  of  interest  through 
the  apparent  importance  of  personality  in  making  assessments.  "They 
should  be  among  the  highest  heights  of  men  in  our  state.  They  are  to 
deal  with  very,  very  important  interests,"  was  the  dictum  of  the  author 
of  the  first  ad  valorem  measure  in  speaking  of  the  membership  of  the 
board.*10  One  board  at  least — the  first  one — received  high  commenda- 
tion from  a  competent  authority.  "The  original  board,"  says  the  report 
of  the  Ontario  tax  commission,  "was  undoubtedly  actuated  by  an  enthusi- 
astic zeal  and  singleness  of  purpose  in  its  work — and  has  accomplished 
great  reforms."*11  No  less  of  praise  is  due  to  each  of  the  succeeding 
boards  so  far  at  any  rate  as  the  first  part  of  the  commendation  is  con- 
cerned and  no  less  has  seemingly  been  accorded  them  by  public  opinion 
throughout  the  state. 

Most  of  the  members,  however,  have  not  been  allowed  the  experience 
in  office  which  the  tax  commissioner's  duties  deserve.  Ten  men  have 
received  appointments  as  commissioners  during  seven  years  in  only  four 
of  which  did  the  membership  of  the  board  exceed  three;  and,  although 
the  usual  legal  term  of  office  has  been  six  years,  only  one  man  has  actu- 
ally served  this  long.  Indeed,  the  average  length  of  service  has  been 
approximately  three  years.  Such  frequent  changes  in  the  composition 
of  the  board  can  scarcely  be  considered  otherwise  than  as  a  great  deter- 
rent to  its  efficiency. 

The  assessment  process  has  been  repeated  in  Michigan  six  times  in 
all,  and  with  as  much  experience  as  this,  any  study  of  this  prerequisite 
to  the  property  tax  would  be  incomplete  without  some  consideration  of 
results.  The  assessments  of  railroads  in  their  general  upward  trend 
correspond  closely  with  the  upward  trend  in  the  assessments  of  general 
property  during  the  same  periods  as  the  following  table  shows : 

*10Col.   Atkinson,   House  Jour.   1898,  App.   p.   13. 
*nRep.   Ontario  Tax  Comm.,  p.  46. 


RAILROAD    TAXATION    IN   MICHIGAN.  49 

Assessments  of  railroad  property— 1902 f  198,641,000 

1903 222,106,000 

1904 196,795,000 

1905 202,651,000 

1906 207,518,000 

Assessments  of  general  property — 1902 1,418,251,858 

1903 1.537.355,738 

1904 1,529,969,350 

1905 1,574,422.770 

1906 1,598,935,606 

The  more  acute  fluctuations  of  the  railroad  assessments, — notably  the 
one  of  1903 — is  a  reasonable  issue  we  may  believe  from  the  more 
mercurial  movements  of  a  single  industry  as  compared  with  the  steadi- 
ness in  values  of  the  whole  property  of  a  state.  The  satisfactory  fact 
is  that  a  period  of  general  prosperity  is  reflected  in  the  upward  trend 
of  railroad  assessments  as  it  is  in  those  of  general  property. 

Naturally  the  comparisons  which  have  just  been  made  may  be  con- 
sidered indicative  in  the  broadest  sense  only,  of  the  justness  of  the 
board's  valuations.  The  trend  of  railroad  assessments  relative  to  actual 
railroad  values  is  of  much  greater  practical  importance  arid  some  sug- 
gestions as  to  the  character  of  this  trend  may  now  be  given. 

Fortunately  for  this  comparison  there  have  been  made  three  authori- 
tative valuations  of  railroads,  other  than  those  which  have  been  made 
by  the  assessors,  within  the  period  of  these  assessments.  These,  ar- 
ranged in  order,  show  wide  discrepancies  between  the  assessments 
and  valuations  to  the  disadvantage  of  the  assessments  in  each  case. 

"The  Michigan  appraisal,"  1901,  valued  the  roads  at  f  202,212,199 ; 
the  assessment  of  1902  at  $198,641,000. 

*12A  special  Michigan  railroad  valuation  by  the  United  States  census 

department,  1904,  $277.597,000;  the  assessment  of  1904  at  $196,795,000. 

13The  Michigan  appraisal  authorized  to  be  brought  to  date  by  its 

authors  in  1905  produced  the  value  of  $284,710,659 ;  the  assessment  of 

1905  was  s202.651.000. 

The  argument  from  antecedent  probability  is  not  lacking  either  to  the 
contention  that  the  roads  have  not  been  assessed  at  their  full  value.  The 
board  has  constantly  urged  its  conviction  that  the  roads  were  paying 
more  than  their  share  of  taxes.  This  was  its  claim  in  opposing  the  suit 
of  the  Detroit  school  board  in  1903, *14  in  the  testimony  of  its  members 
on  the  side  of  the  railroads  in  the  "tax  cases''  of  1904,*15  and  in  its  ap- 
plication of  the  Galbraith  law  to  the  lowering  of  railroad  taxes  in 
1905.*16  Denied  the  privilege  of  adjusting  the  railroad  tax  in  accord- 
ance with  its  conceptions  of  justice — since  the  courts  declared  that  this 
tax  must  result  from  a  purely  "ministerial"  computation — the  board  has 
seemingly  felt  itself  without  other  recourse  in  securing  "equality  of  taxa- 
tion" than  to  ignore  in  part  the  natural  growth  in  railroad  values. 


12Bulletin    21.    Census   Bureau    1904.   p.   8. 

13Detroit    Free    Press    Jan.    22.    1906. 

14Board  of  Education  v.   State  Board  of  Assessors,   121   Mich.   Rep.,  p.   133. 

15Abstracts   and   Records   Mich.   Tax   Cases,    Vol.    Ill,   p.   1203. 

16Laws   1905.   Act   282. 


50  MICHIGAN   STATE   LIBRARY. 

II.     PROBLEMS  OF  THE  BATE  AND  OF*  EQUALIZATION. 

A  taxing  scheme  drafted  largely  from  another  state,  as  this  one  was, 
has  proven  far  more  unmanageable  in  a  new  administrative  setting  than 
its  most  ardent  advocates  could  have  possibly  imagined.  Its  greatest 
lack  has  been  for  some  equalization  device  by  which  the  taxes  drawn 
from  railroads  could  be  brought  to  a  balance  with  those  drawn  from 
other  forms  of  property.  The  omission  of  such  a  device  from  the  original, 
propagating,  Indiana  law  is  readily  enough  explained  through  the  fact 
that  railroad  assessments  in  that  state  were  made  by  the  state  board  of 
equalization.  This  board  as  a  consequence  from  its  equalization  func- 
tion was  therefore  the  ultimate  authority  in  the  assessment  of  general 
property,  consequently  an  equation  in  the  values  of  these  two  kinds  of 
property  for  taxing  purposes  was  easily  accomplished. 

In  Michigan,  on  the  other  hand,  railroad  assessments  and  the  equaliza- 
tion process  were  from  the  first  performed  by  separate  boards  and  cash 
value  alone — a  value  wholly  ideal  in  actual  practice — at  which  all  the 
property  by  statute  is  required  to  be  assessed,  was  looked  to  solely,  by 
the  early  champions  of  tax  reform,  for  their  basis  of  equality. 

An  important  outcome  from  the  "great  appraisal,"  however,  was  the 
development  of  a  valuation  of  the  roads  which  the  public  widely  accepted 
as  the  real  value  of  these  properties.  This  became,  indeed,  as  we  have 
seen,  a  sort  of  standard  valuation  with  which  the  public  tested  the  merits 
of  matters  which  involved  the  quest  of  railroad  values.  From  a  popu- 
larly accepted  valuation  of  this  sort,  few  assessing  boards  would  care 
to  hazard  popular  condemnation  by  making  deductions  and,  indeed,  it 
is  more  than  probable  that  legal  restraints  would  have  been  appealed  to 
for  the  prevention  of  such  action  if  it  had  been  attempted  by  the  board. 
Equalization  between  railroad  and  other  property  in  the  ordinary  sense 
of  adjusting  the  value  of  the  one  to  the  value  of  the  other,  therefore, 
became  impracticable — at  least  so  far  as  altering  railroad  valuations 
downward  is  concerned. 

A  species  of  equalization  it  was  speedily  seen,  was  still  possible  to 
the  Michigan  board  of  assessors,  even  without  the  formal  authority  of 
an  equalization  board  and  in  spite  of  a  somewhat  rigidly  predetermined 
valuation  of  the  roads.  This  was  through  the  power  it  had  of  computing 
"the  average  rate."  This  rate  it  will  be  remembered  should  be  the  "aver- 
age rate"  levied  upon  other  property  for  state,  county,  township,  and 
municipal  purposes  and,  in  determining  the  data  by  which  this  rate  was 
ascertained,  an  opportunity  for  equalization  existed,  which,  without 
altering  railroad  valuations  to  a  parity  with  general  property  valua- 
tions, furnished  means  for  substantially  equal  taxation.  A  reduced  rate 
it  is  manifest  would  produce  the  same  results  so  far  as  tax  payments 
are  concerned  as  would  a  lowered  valuation  of  railroad  property.  But 
a  vision  of  desirable  opportunity,  however,  such  as  this  is  was  not  the  one 
which  came  to  those  who  first  saw  this  possibility  of  equalization  through 
the  rate.  It  was  that  rather,  of  a  hateful  danger  that  the  roads  would 
pay  more  than  their  share  of  taxes  through  the  use  by  the  board  of 
assessors  of  characteristically  undervalued  general  property  as  the 
divisor  with  which  the  average  rate  should  be  determined. 

From  the  many  controversies  concerning  undervalued  general  prop- 
erty which  took  place  there  eventually  issued  by  provision  of  the  legis- 


RAILROAD    TAXATION    IN    MICHIGAN.  51 

lature  a  commission — the  Michigan  tax  commission — which  had  almost 
absolute  authority  over  taxation.*17  To  the  current  assessments  of  gen- 
eral property  for  example  more  than  sixty  per  cent  of  the  increase  was 
added  within  a  short  time  by  this  Board,  and  when,  subsequently,  to 
this  commission,  already  empowered  to  raise  or  lower  assessments,  to 
remove  assessing  officers,  etc.,  there  was  also  given  the  determination 
of  the  average  rate,"  the  machinery  for  effective  equalization  between 
railroad  property  and  other  property  was  seemingly  established. 

This  tax  commission  in  other  words  with  mandatory  power  over  assess- 
ments for  state,  county,  township  and  municipal  purposes  was  identical 
in  membership  with  the  board  of  assessors,  one  of  whose  chief  duties,  as 
we  have  seen,  was  the  determination  of  the  average  rate.  Clothed  with 
such  ample  authority  as  that  which  has  just  been  described,  the  board  of 
assessors,  acting  as  tax  commissioners,  needed  only  to  assess  the  gen- 
eral property  of  the  state  at  its  true  value  in  order  to  have  data  for  the 
computation  of  an  average  rate  which  would  effectually  equalize  the 
taxation  of  the  roads  with  other  property. 

But  the  merely  incidental  right  of  equalization  such  as  this  was,  fell 
far  short  of  satisfying  the  tax  commission-assessing  board.  This  Board 
conceived  that  the  new  tax  law  authorized  the  use  of  the  real — real  in 
the  ideal  sense — value  of  general  property  as  the  divisor  by  which  the 
average  rate  should  be  determined,  and  itself  with  the  power  to  weight, 
or  manipulate,  or  adjudge  the  assessed  value  of  property  until  it  equaled 
this  real  value.*18  The  ascertainment  of  the  statutory  intention  upon 
this  matter  has  been  the  most  troublesome  problem  which  has  arisen 
in  administering  the  tax  as  the  determination  of  the  equity  involved 
has  been  the  greatest  speculative  problem.  The  history  of  the  settle- 
ment of  the  administrative  part  of  this  question  deserves,  therefore,  some 
narration  and  may  be  briefly  told. 

The  Board  employed,  in  brief,  when  the  first  average  rate  was  deter- 
mined, an  ideal  valuation  of  general  property — the  assessed  valuation 
plus  a  make-weight  of  several  millions — as  its  divisor  which  resulted  in 
so  low  a  rate  that  the  tax  contributions  of  the  railroads  to  the  state 
school  funds  were  materially  lowered.  To  resist  a  loss  of  this  kind  the 
Detroit  school  board  appealed  to  the  courts,  and,  in  the  decision  which 
resulted,  the  function  of  the  assessors  was  defined  as  a  "purely  minis- 
terial function" — they  were  merely  to  perform  the  mathematical  com- 
putation of  dividing  the  assessed  value  of  general  property  into  the 
aggregate  of  taxes  in  order  to  produce  the  average  rate.*19  Nothing 
farther  was  now  left  of  the  board's  claim  to  discretionary  or  judicial 
authority  over  the  rate,  but,  equality  between  the  taxes  paid  by  railroads 
and  those  paid  by  general  property,  though  affecting  the  rate,  was  still 
achievable  to  the  board  by  virtue  of  its  incidental  power  to  control  the 
assessments  of  general  property. 

"To  tax  and  to  please  is  not  given  to  men"  runs  the  apothegm  of  the 
great  Burke,  and,  with  the  expiration  of  its  first  half  decade,  the  activi- 
ties of  the  "assessors-commissioners"  board  had  rendered  it  so  unpopu- 
lar that  in  the  legislative  session  of  1905.  the  authority  of  this  board  over 
general  assessments  was  almost  wholly  discontinued.*20  The  board 

*17Laws  of   1899,   Act   154. 

*18Rep.   of  the  State   Board  of  Tax   Commissioners  1900,  p.   119. 

*19Det.   Board  of  Ed.   vs.   State  Board  of  Assessors,   121   Mich.   Rep.,  p.   133. 

*20Laws    1905,    Act    281. 


52  MICHIGAN    STATE   LIBRARY. 

henceforth,  in  fact,  had  no  initiative  in  raising  assessments— few  of  its 
powers  indeed  of  any  sort  remaining  save  those  of  an  advisory  character. 

The  complete  suspension  after  this  fashion  of  the  equalization  process 
between  railroads  and  general  property,  either  through,  formally  equal- 
izing the  assessments  of  these  two  species  of  property  the  one  with  the 
other  or  through  affecting  the  rate,  which  now  prevailed,  proved  dis- 
tasteful even  to  the  legislators.  A  supplementary  measure,  therefore— 
the  Galbraith  law — sought  to  correct  the  restrictions  which  had  been 
placed  upon  the  assessing  board  and  secured  ready  approval  from  the 
legislators.  By  the  provisions  of  this  measure  full  power  was  allowed 
the  state  assessors  "to  ascertain  and  determine"  in  computing  the  aver- 
age rate  the  true  cash  value  of  all  property  of  the  state,  other  than  that 
included  upon  the  assessment  roll.*21  The  power  which  the  taxing  board 
had  once  assumed  to  be  a  pOAver  which  was  within  its  possession  would 
be  one  in  reality  it  was  thought  if  formally  so  conferred  by  legislative 
enactment. 

But  this  was  not  the  view  which  was  taken  by  the  supreme  court  and 
the  adverse  decision  from  this  tribunal  quickly  invalidated  the  "Gal- 
braith" law  as  its  earlier  decision  had  overturned  the  board's  unwise 
assumption.*22  No  practical  authority  remained  now  to  the  assessors 
of  any  sort  by  which  the  equalization  of  taxes  upon  the  two  kinds  of 
property  could  be  accomplished,  nor  have  any  of  the  remedial  devices 
which  have  since  been  proposed  secured  a  place  in  our  taxing  machinery. 

The  equalization  performance,  whenever  used,  is  necessitated  by  that 
imperfection  in  the  general  property  tax  which  allows  property  in  two 
equally  amenable  districts  or  two  equally  amenable  classes  of  property 
to  shirk  the  fulfillment  of  its  liability.  It  is,  of  course,  with  regard  to 
this  latter  species  of  difficulty  that  our  discussion  is  concerned,  and  the 
question  arises  whether  there  are  in  Michigan  such  inequalities  in  the 
taxes  drawn  from  the  two  kinds  of  property — railroad  and  general— 
as  to  necessitate  an  equalization  device.  Is  general  property  in  Michi- 
gan perniciously  undervalued? 

The  undervaluation  of  property  of  this  sort  in  Michigan  is  frequently 
presumed  from  such  circumstantial  evidence  as  affirmative  statements 
to  this  effect  from  such  administrative  officers  of  the  state  as  governors 
and  auditors,  from  confirmatory  reports  by  state  boards  of  tax  commis- 
sioners, from  the  common  popular  impression  that  such  undervaluation 
exists,  and  finally  from  the  existence  of  boards  of  equalization.  In  op- 
position to  such  possible  proofs  as  these  there  is  the  very  weighty  fact 
that  in  the  celebrated  Michigan  tax  cases  of  1902-6  the  railroads  were 
unsuccessful  in  showing  that  general  property  is  undervalued  in  Michi- 
gan though  half  their  case  rested  upon  this  contention.  Futhermore, 
there  has  never  been  in  Michigan,  as  in  so  many  other  states,  any  statu- 
tory compromising  with  the  full  cash  value  standard  by  arranging  per- 
centages at  which  property  might  be  assessed.  On  the  other  hand  the 
assessed  valuations  of  property  in  this  state  have  progressively  increased 
from  year  to  year,  thus  showing  a  harmony  between  the  work  of  the 
assessing  officers  and  the  natural  growth  in  property  values. 

The  conclusion  seems  unavoidable  that  the  absence  of  an  equalization 
device  in  the  Michigan  method  of  railroad  taxation,  while  not  actually 

*21Laws    1905.    Act   282. 

*22143  Mich.   Rep.,  p.   73.   Atfy  Gen'l  vs.   State   Board  of  Tax   Assessors. 


RAILROAD    TAXATION    IN   MICHIGAN.  53 

entailing  inequality  of  taxation— at  least  more  inequality  than  is  un- 
avoidable in  a  general  property  tax — leaves  wide  open  doors  for  such  an 
outcome.  It  is  doubtless  the  possibility  of  such  inequality  which  arouses 
the  strong  popular  sentiment,  which  prevails  throughout  the  state,  favor- 
able toward  action  that  will  deposit  somewhere  the  authority  to  equalize 
taxes  on  railroad  and  general  property. 

The  remedy  itself  which  shall  obtain  is  far  less  easily  determined  than 
is  the  necessity  for  remedy.  The  truth  is  obvious  enough  that  the  "equal- 
ization" which  the  board" of  assessors  desired  to  use  is  not  the  familiar 
curative  process  usually  known  by  this  name.  The  method  sought  by  the 
board  extends  beyond  the  mere  rectifying  of  taxation  bases — the  end  of 
customary  equalization — and  seeks  either  by  adjusting  the  bases,  or 
preferably,  by  correcting  the  rate  to  make  equal,  relatively,  the  burdens 
borne  by  the  two  kinds  of  property. 

The  reform  of  the  day  in  taxation  matters  "segregation  of  sources," — 
though  ostensibly  a  remedy  for  equalization  difficulties — does  not  touch 
this  sort  of  equalization.  The  exactly  antithetical  reform  to  the  "segre- 
gation" reform,  the  mandatory  commission  or  "Indiana  plan,"  seems 
indeed  much  more  feasible.  The  desired  balance  between  the  taxes  drawn 
from  the  two  kinds  of  property  must  be  secured — so  the  nature  of  the 
difficulty  seems  to  imply — by  strengthening  some  board  with  power  to 
alter  assessments,  or  rates  or  both.*24 

The  determination  of  the  rate  itself,  aside  from  the  question  of  prin- 
ciple involved,  seems  to  have  aroused  few  difficulties.  The  performances 
of  the  board  in  this  direction  have  furnished  the  following  rates  for  the 
corresponding  years: 

*231902,  |16.91;  1904,  $16.92;  1905,  $17.40;  1906,  $16.47;  1907,  $17.62; 
1908,  $18.00  per  thousand. 


III.     RESULTS  FROM  THE  TAX. 

The  revenue  results  from  the  new  tax  have  equalled  the  highest  expec- 
tations of  the  reformers,  since  the  tax  receipts  from  the  roads  have  been 
more  than  doubled.*23  The  first  payments,  indeed,  exceeded  so  strik- 
ingly the  accustomed  returns  from  the  railroad  imposts  that  a  threaten- 
ing agitation  was  started  toward  limiting  by  a  constitutional  amend- 
ment the  amounts  which  should  thenceforth  go  to  support  the  schools.*26 

The  two-fold  gross  increase  in  receipts  which  the  new  tax  developed, 
when  compared  with  the  old,  does  not  measure  accurately,  however, 
the  entire  productiveness  of  the  old  tax,  since  both  the  mileage  and  the 
traffic  of  the  roads  were  greater  during  the  period  of  the  later  tax  than 
during  that  of  the  earlier.  The  vitiation  of  the  comparison,  which  re- 
sults from  the  differences  in  mileage  which  prevailed  during  the  two 
periods  may  be  overcome,  however,  by  showing  the  increase  in  tax  re- 
ceipts per  mile  during  the  period  of  the  new  tax  as  compared  with  that 

*23Auditor  General's  Rep.   1907.  p.   141. 

*24The  State  legislature,  in  the  session  of  1911,  enacted  the  Lord  bill  by  which  the 
Board  of  Assessors  was  reempowered  with  the  authority  to  reassess  property  throughout 
the  State  upon  its  own  initiative.  The  opportunity  is  therefore  again  given  the  Board  to 
equalize  through  assessing  property  everywhere  at  its  true  value. 

*25Average  receipts  from  road  under  the  gross  income  tax  during  the  period  from  1897- 
1901.  $1.210.129.09.  Average  receipts  from  roads  under  the  property  tax  during  the 
period  from  1902-1907,  $3,463,809.61.  Percentage  of  the  old  tax  which  was  equalled  by 
the  new.  201. 

*26Governor   Warner's   Message.      House   Jour.   1897,   p.   35. 

8 


54  MICHIGAN    STATE   LIBRARY. 

of  the  old.  The  trend  is  as  follows  and  shows  a  doubling  in  the  receipts 
of  the  poorest  year  under  the  new  tax  as  compared  with  the  best  year 
under  the  old : 

Average  Taxes  Per  Mile. 

Property  tax— First  year $398  09 

Second  year  443  18 

Third  year 391  07 

Fourth  year  410  09 

Gross  income  tax — Last  year 177  43 

Next  to  last  year 167  85 

Next    135  45 

Next    95  13 

The  most  satisfactory  test  of  the  superior  productiveness  of  the  new 
tax  over  the  old,  however,  results  from  the  joint  appearance  of  both  exac- 
tions during  several  years.  This  curious  occurrence  was  the  outcome 
of  the  determination  on  the  part  of  the  roads  to  continue  paying  taxes 
under  the  old  law  until  the  legality  of  the  new  one  had  been  established. 
The  board  of  assessors  levied  during  the  same  years  the  amounts  for 
which  the  roads  were  amenable  under  the  new  law.  The  results  from 
the  comparisons  which  follow  are  not  entirely  satisfactory  since  some 
of  the  smaller  roads  accepted  the  new  law  from  the  beginning. 

1902  1903  1904 

Taxes  paid  by  the  roads  as 

determined    by    the    old 

law   11,668,435  86    f  1,865,974  86    f  1,779,642  86 

Taxes    determined   by    the 

board  under  the  new  law  3,288,162  06  3,756,149  42  3,330,350  59 
Percentages  of  the  gross 

income  taxes  equalled  by 

the  property  taxes 197 .  201 .  190 . 

The  effects  of  the  new  tax  upon  the  individual  roads  may  be  shown 
by  a  comparison  of  the  average  payments  made  by  the  roads  each  year 
during  the  last  half  decade  under  the  old  law  with  the  first  period  of 
the  same  length  under  the  new.  The  presentation  which  follows  shows 
the  results  of  the  tax  upon  each  road  under  fairly  similar  conditions, 
too,  since  no  data  is  tabulated  for  any  road  which  had  not  paid  taxes 
for  five  years  under  the  old  law  and  was  not  presumably  therefore  a 
finished  road. 

The  traffic  conditions  were  fairly  similar,  also,  for  both  the  periods 
under  comparison  since  both  were  fully  included  within  the  group  of 
years  dominated  by  our  recent  prosperity.  The  comparison  is  as  follows : 


RAILROAD    TAXATION    IN   MICHIGAN. 


55 


Road. 

Average 
receipts  during 
five  years 
previous  to 
1902  under 
the  gross 
income  tax. 

Average 
receipts  during 
five  years 
subsequent  to 
1901  under 
general 
property  tax. 

Per  cent  1 
of  increase. 

\nn  \rbor  Railroad  Co 

$40,104  54 

$129  320  43 

222 

Arcadia  &  Betsey  River 

270  26 

1  263  90 

367 

AuSable  &  Northwestern                         

1,135  22 

3,018  47 

166 

Chicago   Kalainazoo  &  Saginaw 

1  771   56 

8  320  27 

370 

Chicago  Milwaukee  &  St   Paul  

8,045  52 

59,981  63 

744 

Chicago  &  Northwestern 

72  983  29 

219  245  55 

200 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis  (C.  W.  &  M.)  .  . 
Detroit  &  Mackinac 

4,523  95 
17  134  24 

16,719  99 
71  957  98 

248 
268 

Detroit  Union  R  R.  Depot  &  Station  Co  

1,079  30 

26,104  04 

2328 

Duluth   South  Shore                                       

55  528  10 

175,511  04 

216 

Fort  St   Union  Depot  Co          

8,177  30 

30,670  70 

275 

Grand  Rapids  &  Indiana 

66  824  48 

177  974  60 

160 

Wisconsin  Central  (Gogsbic  &  Montreal)  

1,001  32 

6,403  81 

539 

Traverse  Citv  R   R                                                     ... 

1    197  51 

4  212  99 

252 

Grand  Trunk  Western,  Chicago,  Detroit,  Canada  Co  
Grand  Trunk  Junction 

102,980  07 
8  335  48 

200,601  94 
29  332  62 

95 
251 

Cincinnati   Saginaw  &  Mackinac 

4  103  39 

12  474  36 

204 

Detroit   Grand  Haven  &  Milwaukee 

32  032  99 

102  078  00 

215 

Michigan  \ir  Line  Railway 

2  665  75 

9  434  12 

262 

St.  Clair  Tunnel  Co                             

5  523  49 

25  771  90 

366 

Toledo,  Saginaw  &  Muskegon      

3,251   80 

10,789  12 

231 

Hecla  &  Torch  Lake 

5  905  21 

5  945  72 

006 

Lake  Shore  &  Michigan  Southern 

37  429  95 

152   120  42 

336 

Detroit  &  Chicago         .  .            

514  44 

3  875  96 

653 

Detroit    Hillsdale  &  Southwestern 

1   123  29 

11   796  39 

958 

Detroit   Monroe  &  Toledo                    

19  871   96 

63  711  77 

220 

Fort  Wayne  &  Jackson  

1,767  66 

10,773  32 

510 

Kalamazoo,  Allegan  &  Grand  River    .                  

4  634  31 

20  344  00 

509 

Kalamazoo  &  White  Pigeon 

3  219  17 

13  645  76 

324 

Northern  Central,  Michigan  

2  722  19 

15  166  80 

494 

Manistee  &  Grand  Rapids 

2  435  35 

8  828  58 

260 

Manistee  &  Northwestern 

7  365  40 

25  279  00 

241 

Manistique  Railroad 

2  233  37 

3  956  75 

77 

Mason  &  Oceana  

482  36 

1  467  10 

223 

Mineral  Range 

9  176  25 

32  679  95 

256 

Michigan  Central  

235  092  83 

508  056  82 

111 

Battle  Creek  &  Sturgis 

551  40 

5  117  62 

828 

Bay  Citv  &  South  Bend  

295  20 

2  527  80 

760 

Canada  "Southern  Bridge  Co 

48  00 

5  955  60 

1272 

Detroit  &  Bav  Citv  

23  526  20 

68  102  50 

145 

Detroit,  Delrav  &  Dearborn 

87 

842  60 

967 

Grand  River  Valley  

9  526  55 

26  630  07 

175 

Jackson,  Lansing  &  Saginaw 

42  450  88 

78  697  01 

85 

Kalamazoo  &  South  Haven  

1   518  35 

5  476  90 

260 

Michigan  Air  Line    

8  134  33 

33  537  16 

314 

Michigan,  Midland  &  Canada 

178  50 

1   685  20 

844 

Toledo,  Canada,  Southern  &  Detroit 

44  560  74 

87  638  20 

69 

Minneapolis,  St.  Paul,  Etc.,  S.  M  
Pere  Marquette  

20,938  50 
195  102   11 

94,577  95 
491  022  98 

356 
151 

Quincy  &  Torch  Lake     . 

1  076   10 

3   794  26 

262 

Sault  Ste.  Marie  &  Bridge  Co  
Wabash  Railroad  

916  83 
30  993  23 

7,168  55 
71   845  63 

659 
135 

These  computations  show  vividly  the  increased  burdens  to  which  the 
different  roads  were  subjected  by  the  new  tax — an  enlargement  in  pay- 
ments amounting  in  some  cases  to  a  four-fold,  in  others  to  a  twelve  and 
in  a  few  instances  to  even  a  twenty-three-fold  increase  over  the  exactions 
of  the  gross  income  tax.  The  data  shows  but  little  more  than  this,  how- 
ever, because  through  the  unlikeness  in  the  character  and  in  the  admin- 
istration of  the  two  taxes  little  or  nothing  may  be  safely  inferred  con- 


56  MICHIGAN   STATE  LIBRARY. 

cerning  the  justice  to  the  different  roads  of  the  varying  increases.  The 
evidence  is  added,  too,  however, — although  conclusive  proofs  of  the  facts 
were  already  everywhere  conceded  by  those  who  were  acquainted  with 
the  matter — that  the  income  tax  had  been  seriously  inadequate  in  its 
exactions  since  none  of  the  roads  find  difficulty  apparently  in  meeting 
the  increased  obligations  which  are  laid  upon  them  by  the  more  drastic 
property  tax. 

The  taxation  of  agencies  closely  associated  with  railroads  has  been 
very  plainly  influenced  by  the  nature  of  the  levy  upon  this  latter  taxable. 
Such  utilities  as  are  typified  by  express  companies,  union  station  and 
depot  companies,  car  loaning,  stock  car,  refrigerator  and  fast  freight 
companies,  which  like  the  railroads  were  originally  levied  upon  with  a 
gross  income  tax,  became  likewise  with  the  railroads  subject  to  the  prop- 
erty tax  when  this  method  became  the  established  method  of  the  state.*27 
Nothing  seems  more  certain*  either  than  that  the  remainder  of  these 
principal  public  service  utilities — the  telegraph  and  telephone  lines — 
will  shortly  succumb  to  the  new  method  of  taxation — agitation  in  this 
direction  having  almost  prevailed  in  several  of  the  recent  sessions  of  the 
legislature. 

The  influence  of  the  reformed  taxation  of  railroads  upon  the  property 
tax  as  applied  to  general  property  has  been  most  striking  also,  since  even 
the  most  insistent  champions  of  the  higher  taxation  of  railroads  have 
come  ultimately,  in  the  interests  of  justice  and  through  the  necessities 
of  the  "average  rate,"  to  urge  the  taxation  of  all  property  at  its  full 
cash  value.  A  permanent  board  of  state  tax  commissioners  which  in- 
creased the  assessed  value  of  the  property  of  the  state  by  more  than  a 
third  as  we  have  already  seen  during  the  first  year  of  its  existence*28 
is  one  of  the  chief  fruits  from  this  insistence.  The  new  railroad  tax 
must  certaintly,  therefore,  receive  a  full  share  of  credit  for  the  greater 
revenues  which  have  resulted  to  the  treasury  through  the  use  of  the 
improved  tax  upon  the  utilities  companies  and  through  the  more  efficient 
taxation  of  general  property. 

*27Mich.   Statutes  1901.     Act  No.  173. 

*28Report  of  State  Tax  Commr.   1902,   p.   101. 

NOTE. — By  Act  49,  session  of  1909,  the  tax  was  applied  to  telephone  and  telegraph  com- 
panies. The  full  list  of  companies  now  subject  to  this  tax  is,  as  follows :  Railroad  and 
union  station  and  depot  companies,  express  companies,  stock,  sleeping,  refrigerator,  fast 
freight  and  car  loaning  companies  and  telegraph  and  telephone  companies.  Express  com- 
panies had  been  included  in  the  list  of  public  utility  companies  which  were  levied  upon 
with  an  average  rate  as  provided  by  the  law  of  1901 — Act  273. 


RAILROAD    TAXATION    IN    MICHIGAN.  57 


CHAPTER  FIVE. 

THE   DISPOSITION   OF  THE  RAILROAD   TAX:     SUMMARY. 

The  railroad  impost  in  Michigan  is  in  effect  a  special  tax — its  proceeds 
having  always  gone  to  support  the  public  schools.  The  explanation  of 
this  unusual  disposition  of  the  tax  rests  partly  upon  a  necessitous  ar- 
rangement which  was  made  in  the  early  history  of  the  state  and  partly 
upon  a  zealous  solicitude  for  public  schools  which  has  been  felt  always 
by  the  people  of  this  commonwealth. 

I.     STATE  TAXATION  FOR  LOCAL  EXPENDITURES. 

The  origin  of  the  arrangement  is  the  direct  outcome  from  the  "internal 
improvement"  activity  which  the  state  experienced  in  its  early  history. 
The  commonwealth  had  used  the  proceeds  from  the  school  lands — 16th 
section  in  each  township — in  the  construction  of  its  internal  improve- 
ments. The  interest  upon  the  resulting  indebtedness — now  known  as 
the  primary  school  interest — had  for  a  time  been  paid  from  the  general 
fund  in  the  state  treasury.  But  with  the  sale  of  the  roads  and  the  re- 
ceipt of  tax  payments  therefrom  the  suggestion  is  made  by  Auditor 
Bell — report  of  1847 — that  these  tax  payments  should  be  devoted  to  meet- 
ing the  interest  charges  on  the  school  fund.  This  would  "only  be  proper" 
he  declares  "since  these  debts  are  largely  chargeable  to  the  internal  im- 
provement fund."*1  The  relations  between  railroads  and  schools  thus 
entered  into  in  1847  was  made  permanent  by  the  constitutional  conven- 
tion of  1850  and  the  further  provision  was  added  by  this  body  that  with 
the  termination  of  the  state's  indebtedness  all  railroad  taxes  as  well  as 
all  other  specific  taxes  were  to  be  devoted  to  public  schools.*2 

The  application  of  the  railroad  taxes  to  the  support  of  schools  has 
been  unstintedly  praised — in  early  times  as  the  most  stable  source  of 
income  which,  in  that  period  of  disordered  finance,  the  schools  could 
have  and  more  recently  "since  these  corporations  derived  their  power, 
their  rights  and  their  entire  privileges  from  the  entire  state  at  large  it 
seems  reasonable  that  taxes  derived  from  them  should  be  applied  to  a 
fund  created  for  the  benefit  of  all  sections  of  the  state."*3 

The  reflex  influence  upon  the  railroad  tax  of  applying  its  proceeds  to 
the  schools  has  proven  almost  controlling.  Governor  Pingree  emphasizes 
this  in  his  statement  that  "there  is  a  potent  reason  against  the  local 
taxation  of  railroads  and  that  is  the  custom  of  the  state  to  devote  these 
taxes  to  some  portion  of  the  school  fund."*4  A  vital  dependence  of  the 
schools  upon  this  tax  was  felt,  too,  seemingly,  by  the  Michigan  legisla- 
tors, when  discussing  the  substitution  of  ad  valorem  for  specific  taxes 
in  the  taxation  reform  movement  of  1896-1901,  since  not  infrequently 

*!Aud.    Rep.   1847,   p.   16. 
*2Constitution    1850,   Art.    XIV.    Sec.    1. 
*3Gov.   Pingree's  Mes.  1899,  p.  32. 
**Gov.    Pingree's   Mes.    1899,   p.    32. 


58  MICHIGAN   STATE   LIBRARY. 

the  assertion  was  made  in  these  discussions  that  the  endangering  of  the 
school  support  was  the  chief  objection  to  making  the  desired  substitution 
and  to  many  this  remained  until  the  end  an  insuperable  objection.*5 
The  new  tax,  too,  when  finally  adopted,  though  strictly  ad  valorem  in 
character  must  still  subserve  the  school  fund  in  accordance  with  the 
provisions  of  the  constitutional  amendment  which  made  the  tax  pos- 
sible.*0 Finally,  a  concrete  illustration  of  the  subjection  of  the  tax  to 
the  schools  is  found  in  the  successful  suit  of  the  Detroit  school  board 
against  the  state  board  of  assessors  to  compel  the  use  of  a  method  of 
rate  making  which  met  with  its  approval  by  which  the  impost  upon  the 
railroads  should  be  increased  with  a  consequent  benefit  to  the  school 
funds.*7 

Much  as  the  application  of  the  railroad  taxes  to  the  support  of  schools 
is  cherished  by  the  people  of  the  state — stimulated  as  it  is  both  by  tradi- 
tion and  by  a  zeal  for  schools  which  in  this  commonwealth  amounts  to 
a  passion*8 — there  is  a  constantly  growing  dissatisfaction  with  the  ar- 
rangement. Fault  finding  has  been  especially  sharpened  by  the  enormous 
amount  to  which  the  fund  for  distribution  among  the  schools  has  at- 
tained since  the  adoption  of  the  new  railroad  tax.*9  The  amount  has 
averaged  during  this  time  an  annual  sum  greater  than  $3, 500,000,  or  a 
per  capita  disbursement  of  more  than  five  dollars  for  each  child  in  the 
state.  Indeed,  a  recent  report  from  the  department  of  public  instruc- 
tion shows  that  1,296  out  of  the  7,276  school  districts  within  the  state 
receive  each  year  larger  disbursements  from  the  state  fund  than  they 
can  lawfully  use — have,  in  fact,  so  the  report  states,  from  $500  to  $5,000 
of  primary  school  interest  fund  on  hand  which  has  accumulated  during 
the  recent  years.*10  The  limit  of  helpfulness  has  been  reached  apparently 
when  results  like  these  become  the  rule. 

From  the  purely  administrative  standpoint,  also,  the  distribution  of 
railroad  taxes  to  the  support  of  schools  shows  little  that  is  commendable. 
Practically,  the  plan  followed  has  always  involved  the  assignment  of 
these  receipts  to  the  various  schools  of  the  state  in  sums  proportionate 
to  the  numbers  of  pupils  to  whom  these  schools  were  available.  Higher 
state  institutions  have  assignments,  too,  but  upon  a  different  basis  of 
distribution  and  in  amounts  relatively  insignificant.  The  custom  here 
described  develops  also  an  administrative  fault  which  has  frequently 
been  the  source  of  complaint  from  state  auditors  that  the  state  collects 
these  taxes  and  distributes  them  to  the  districts,  while  at  the  same  time, 
through  the  general  property  tax  the  districts  are  making  return  con- 
tributions of  almost  equal  amounts  to  the  state  treasury. 

But  the  chief  defect,  the  one  which  outweighs  all  others  in  the  dis- 
tribution of  railroad  taxes  to  the  support  of  schools  is  the  absence  of 
adequate  accountability  which  prevails  in  the  expenditure  of  these  dis- 
bursements. The  sum  received  by  the  locality  is  in  the  nature  of  a 
bounty  from  the  state  for  the  promotion  of  education  and  the  looseness 
in  regard  to  results,  which  seems  characteristic  of  all  bounties  as  com- 

*5Sen.    Jour.    1898,   p.    126,   117,   121,    136,   and   many   others. 

*6Con.   Amend.    Sees.   10  and   11,   Art.   XIV. 

*7Board   of  Education   of   Detroit  vs.   U.    S.   Board   of  Assessors,   133   Mich.,   p.   116. 

*8"Intelligence  of  a  high  order  characterized  the  population  of  this  state.  Already  had 
the  educational  system  been  established  which  has  grown  into  one  surpassed  by  none  in  the 
world,  and  which  has  become  a  fruitful  model."  Rhodes'  History  of  U.  S.,  Vol.  II,  p.  48. 

*9Something  almost  sensational  and  provocative  of  an  unusual  amount  of  adverse 
criticism  upon  the  whole  arrangement  was  the  huge  sum  of  $8,901,106  or  $12  per  capita 
which  in  1906-7  constituted  this  school  fund.  This  accumulation  arose  from  the  de- 
ferment on  the  part  of  the  railroads  until  the  court  decisions  of  this  year  before  making 
payments  under  the  new  tax. 

*10Bulletin   No.  20,   Dept.  Public  Instruction,  p.  6. 


RAILROAD    TAXATION    IN   MICHIGAN.  59 

pared  with  other  governmental  disbursements,  may  be  easily  found  here. 
The  community  is  but  slightly  stimulated  to  increased  effort  in  the  in- 
terests of  education  by  the  receipt  of  this  bounty  since  public  education 
is  already  highly  cherished  throughout  the  state.  On  the  other  hand, 
the  devolution  annually  upon  the  school  district  of  a  sum  of  money  so 
large  that  in  more  than  a  thousand  of  these  divisions  it  is  in  excess  of 
what  can  be  used  not  only  entails  actual  waste  of  funds  but  furnishes 
a  powerful  temptation  to  the  cupidity  of  the  local  recipients. 

Xothing  of  equivalent  advantage  either  to  the  state  government  can 
be  shown  as  a  resulting  compensation  for  these  large  outlays.  There  is 
little  of  centralized  control  of  schools  in  Michigan,  and,  with  the  excep- 
tion of  the  requirement  of  a  uniform  number  of  months  of  school  per 
year  under  licensed  teachers  and  the  exaction  of  reports  from  the  various 
districts,  centralized  support  bears  few  other  fruits  so  far  as  the  state 
government  is  concerned.  In  the  interests  of  the  schools  many  sugges- 
tions have  been  made  for  reform — such  as  the  apportionment  of  the  fund 
to  the  districts  on  the  basis  of  the  number  of  teachers  employed,*11  and 
the  arbitrary  division  of  the  funds  between  the  higher  institutions  of 
learning  and  the  common  schools  so  as  to  increase  the  portion  of  the 
former,*12  but,  although  a  remedy  of  some  sort  seems  imperative  any 
analysis  of  these  curative  proposals  would  naturally  transgress  the  pur- 
pose of  a  study  of  this  sort. 

The  equitableness  of  the  distribution,  which  has  been  made  in  this 
state  of  railroad  tax  receipts,  purely  as  a  matter  of  distribution,  is  much 
clearer  than  is  the  worthiness  of  the  administrative  methods  which  have 
been  employed.  So  taxably  rich  are  railroads  everywhere  that  the  intra- 
state  struggle  between  competing  taxing  jurisdictions  for  access  to  these 
properties  has  not  been  less  keen  than  has  been  the  inter-state  rivalry 
for  the  same  privilege.  On  the  one  hand  the  minor  civil  divisions  pene- 
trated by  railroads  submit  their  claims,  that,  through  furnishing  these 
properties  with  fire,  police  and  other  protection  they,  are  entitled  to  re- 
imbursement by  a  share  in  the  taxes  which  accrue.  The  manifestly  just 
demands  of  these  local  governments  for  some  returns  from  a  property 
which  entails — in  cities  at  least — high  public  expenditures  is  reinforced 
by  the  well  known  compulsion  which  rests  upon  these  governments  of 
devising  new  ways  for  securing  more  revenue. 

From  the  state  governments,  however,  the  railroads  receive  supervision 
which  is  constantly  becoming  more  minute  and  more  expensive.  The 
roads  have  valuable  property,  too,  which  cannot  be  easily  localized  for 
taxation,  and,  besides,  they  are  granted  corporate  franchises  and  other 
valuable  privileges  by  the  state.  Upon  grounds  like  these  the  state  bases 
a  just  claim  to  revenue  from  these  great  properties. 

The  outcome  in  most  of  the  states  of  this  rivalry  among  the  political 
divisions  has  been  a  compromise  by  which  the  state  assesses  the  rail- 
roads, and.  subsequently,  apportions  their  assessed  valuations  to  the 
minor  political  divisions  where  the  tax  is  imposed,  collected  and  its  pro- 
ceeds expended.  A  less  one-sided  settlement  is  found  in  some  of  the  chief 
railroad  states  whereby  the  minor  civil  divisions  collect  a  revenue  from 

^Bulletin    1620.    Dept.    of    Public    Instruction,    p.    6. 
*12Gov.   Warner's   Message,   1907,   p.   35. 


60  MICHIGAN   STATE  LIBRARY. 

such  railroad  property  as  is  easily  localized  while  the  state  collects  from 
the  franchise  or  "corporate  excess"  values  and  from  the  more  general 
kinds  of  property.  In  a  few  of  the  states,  also,  which  have  been  sufficiently 
untrammeled  by  tradition  or  constitutional  restrictions  as  to  separate 
the  sources  from  which  the  local  divisions  and  the  state  secure  their 
revenues  the  whole  income  from  the  railroad  tax  has  gone  to  the  central 
government.  This  arrangement,  when  practicable,  satisfies  fairly  well 
the  claims  of  justice  since  the  local  divisions  are  freed  from  the  burden 
of  state  taxes  while  the  benefits  from  the  state  government  are  so  widely 
distributed  that  all  citizens  receive  a  share.  None  of  the  commonwealths 
whatsoever  in  which  there  are  railroads  enough  to  make  the  matter  of 
moment  have  escaped  this  problem  of  the  proper  distribution  of  the  re- 
ceipts from  these  great  taxables,  and,  in  all  of  them,  one  or  another  of 
the  plans  just  described  has  been,  eventually,  the  method  which  has  been 
chosen. 

The  plan  of  distribution  is  indeed  of  vital  importance  to  the  common- 
wealth in  its  choice  of  imposts,  since  few  instances  of  greater  tenacity 
can  be  found  than  those  shown  by  the  hold  of  the  beneficiary  of  a  tax 
upon  the  source  of  its  subsidy;  nor  many  instances  of  livelier  activity 
than  is  shown  by  this  same  dependent  in  shaping  its  support  to  its  own 
interest. 

Michigan  from  the  first  has  permitted  no  taxation  of  railroads  by  any 
other  than  the  state  government,  and,  in  this  respect,  her  method  has  been 
identical  with  that  of  the  states  in  which  there  is  a  "segregation  of 
sources  as  between  the  local  and  the  central  governments.  Contrary  to 
the  practice  of  these  states,  however,  the  distribution  of  these  tax  re- 
ceipts in  Michigan,  as  we  have  seen,  has  been  to  specific  localities, — i.  e., 
the  school  district — rather  than  a  general  distribution  through  the  bene- 
fits which  are  commonly  derived  from  a  state  government.  Does  a  plan 
of  this  sort — state  taxation  for  local  expenditure — conserve  the  rights 
of  the  different  jurisdictions?  Does  it  properly  satisfy  the  just  claims 
of  the  different  governments  to  shares  in  the  taxes  drawn  from  railroads  ? 

The  handling  of  railroads  in  Michigan  from  a  fiscal  standpoint — state 
taxation  for  local  expenditure — illustrates  a  principle  of  constantly 
growing  usefulness  in  cases  where  public  income  must  be  collected  from 
properties  by  the  centralized  or  "unitary"  methods  of  tax  admin- 
istration in  order  to  insure  proper  treatment,  but  upon  which,  also,  a 
dependency  is  still  felt  by  the  local  governments  for  support.  The 
properties  imposed  with  a  specific  or  corporation  or  license  tax  or,  in 
general,  those  taxed  by  a  state  board  are  the  typical  ones  of  which  this 
situation  is  true  and  in  the  taxing  of  which  this  principle  is  most  plainly 
applicable.  But  the  practice  of  state  administration  for  local  uses — 
"division  of  yield"  as  it  is  sometimes  called — is  also  pertinently  suggested 
for  use  in  states  where  there  is  a  "segregation  of  sources,"  as  a  remedy 
for  the  fatal  "non-elasticity"  which  the  separation  of  state  from  local 
taxation  customarily  develops  in  the  revenues  of  the  centralized  govern- 
ment.*14 

The  plan  lays  no  claim  to  novelty,  since  centralized  methods  of  taxa- 
tion for  local  expenditure  have  been  widely  practiced  abroad,  while  every 
essential  characteristic  of  the  "division  of  yield"  scheme  may  be  found 
in  the  well  known  "surplus  distribution"  of  the  Federal  government  in 

*14Seligman  Columbus  Tax  Conference,  Nov.  1907. 


RAILROAD    TAXATION    IN   MICHIGAN.  61 

1837,  but  it  is  the  contemporary  growth  in  the  numbers  and  magnitude 
of  the  properties  to  which  the  plan  is  applicable  which  causes  its  present 
importance. 

Useful  as  the  method  is  and  increasingly  useful  as  it  is  in  promise  the 
theory  upon  which  "divisions"  should  be  made  is  not  at  all  developed 
if  indeed  a  theory  is  conceivable  where  the  usual  application  of  the 
scheme  is  to  taxes  with  pronounced  individual  peculiarities.  The  "di- 
visions," however,  must  be  obviously  two  fold  in  number — one  which  will 
separate  the  portion  of  the  tax  receipts  which  goes  to  the  state  from 
that  which  goes  to  the  localities,  and,  another,  which  will  make  a  distri- 
bution among  the  localities.  No  principle,  which  may  be  generally  used, 
is  readily  apparent  which  will  arbitrate  between  the  state  and  the  locali- 
ties, but  in  the  adjustment  of  the  claims  of  the  minor  political  divisions, 
two  basing  points  at  least  of  apportionments  may  not  be  neglected  with 
propriety.  These  are  the  situs  of  the  owner  of  the  property  taxed  and 
the  situs  of  the  property  itself. 

The  selection  of  the  property -location  basis  of  apportionment 
is  approved  because,  customarily,  it  is  at  the  place  where  property  is 
situated  that  the  expenses  of  its  police  and  fire  protection,  street  traffic 
facilities,  building  privileges,  etc.,  are  incurred  and  there  seems  no  war- 
rant in  justice  that  any  property  which  is  benefited  should  escape  its 
share  of  burdens  of  this  sort.  A  complete  endorsement  of  this  basis  is 
made  by  Mr.  H.  G.  Friedman  in  his  study  of  the  corporation  tax  in 
Massachusetts  by  the  assertion  that  "the  limits  of  the  community  corre- 
lated with  a  corporate  industry  should  be  the  confines  within  which  the 
tax  is  expended."*15  On  the  other  hand  the  choice  of  the  owner's  situs 
as  the  determinant  of  the  place  where  the  tax  receipts  shall  be  expended 
has  only  the  single  merit  that  it  is  in  harmony  with  the  usual  situs  prin- 
ciple which  governs  in  the  taxation  of  other  personalty,  namely,  that 
personalty  follows  the  situs  of  its  owner. 

The  Michigan  plan  of  "yield  division"  was  shaped  by  the  practical 
needs  of  the  state  school  system  and  by  the  accidental  relations  between 
this  system  and  the  railroad  building  fund  and  was  uninfluenced  by  any 
theory  of  division  whatsoever.  The  plan  has  been  much  more  moulded 
by  the  presumed  needs  of  the  schools  than  by  any  considerations  affect- 
ing the  equitable  distribution  of  the  railroad  tax  receipts,  but,  while  of 
an  accidental  character,  as  we  have  seen,  it  harmonizes  measurably 
with  the  requirements  of  good  theory  in  its  methods  of  distribution 
among  the  localities. 

The  plan  of  apportioning  railroad  tax  receipts  to  school  districts  in 
accordance  with  the  number  of  children  of  school  age  within  the  district 
naturally  favors  the  more  populous  city  school  areas  as  compared  with 
those  of  the  country.  As  illustrative  of  this  situation  the  records  of  the 
superintendent  of  public  instruction  show  that  in  1907  one-quarter  of 
the  school  fund  was  distributed  to  ten  of  the  largest  cities  in  the  state, 
and,  of  these,  Detroit  alone  received  approximately  a  half  million  or 
one-seventh  of  the  entire  amount  of  these  tax  receipts.*16  But  it  is  in 
these  cities  that  the  charges  for  caring  for  railroad  property  falls  the 
heaviest  upon  the  public  and  it  seems  in  accordance  with  equity  that 
in  these  political  divisions  the  largest  amount  of  benefit  from  the  school 

*15Corporation  taxes  in   Mass,  page  73,  H.   G.   Friedman. 
*16Computation    in   the   office   of   Superintendent   of   Public   Instruction. 
9 


62  MICHIGAN    STATE   LIBRARY. 

fund  should  be  received.  It  seems  not  improbable  that  some  one  of  the 
many  attempts  to  establish  the  local  taxation  of  railroads  in  Michi- 
gan*17 would  long  since  have  been  successful  were  it  not  for  the  real 
though  rough  measure  of  justice  which  this  scheme  of  ''yield  division" 
provides  through  assigning  to  the  cities  and  villages  a  larger  portion 
of  the  school  fund  than  is  received  by  other  divisions  of  the  state. 

"The  divisions  of  yield"  between  the  localities  and  the  state,  which  has 
just  been  mentioned,  as  the  first  of  the  two  "divisions"  which  must  logi- 
cally be  made,  is  also  not  without  recognition  in  the  Michigan  plan. 
The  rule  seems  an  invariable  one  among  the  commonwealths  that  some 
contribution  shall  be  made  to  the  support  of  the  local  schools  from  the 
commonwealth  government  itself.  None  of  the  commonwealths,  indeed, 
oblige  the  schools  to  rely  wholly  upon  the  locality  for  support.  An 
obligation  of  this  sort  resting  upon  the  Michigan  government  must  have 
been  met  by  taxation  of  some  sort  and  the  responsibility  seems  not  in- 
adequately administered  when  the  amounts  which  should  go  to  the  state 
as  its  share  of  railroad  tax  receipts  are  made  use  of  to  constitute  the 
contribution  which  the  state  makes  to  the  support  of  public  schools. 

The  whole  scheme,  however,  has  not  gone  unscathed  from  adverse 
criticism,  especially  from  public  officials  of  the  state.  Governor  Rich 
urges  in  1897  in  the  interests  of  the  state  treasury  that  if  the  constitu- 
tion should  be  so  amended  "as  to  permit  specific,"  i.  e.,  railroad  taxes, 
"to  be  put  in  the  general  fund  an  amount  sufficient  to  provide  for  the 
wants  of  the  state  government,  well,  could  be  raised  in  a  manner  much 
more  equitable  and  less  burdensome  to  the  people  than  by  the  present 
method."*18  And  a  recommendation  of  similar  tenor  is  made  by  Auditor 
Stone  in  1891  in  the  interests  of  improved  administration  that  "the  con- 
stitution should  be  so  amended  as  to  permit  the  use  of  surplus  specific" 
(railroad)  "taxes  by  the  state."*19  Auditor  Dix  in  1900  asserts  "that 
many  complaints  had  reached  him  concerning  the  use  of  the  specific" 
(railroad)  "taxes  in  the  support  of  schools,"*20  and  this  assertion  is 
supplemented  by  a  lengthy  discussion  showing  the  unjust  irregularities 
in  the  subsidies  to  the  different  counties  which  result  from  the  Michigan 
method  of  distribution. 

An  interesting  speculation  arises,  in  view  of  the  wide  popularity  en- 
joyed by  the  much  discussed  "segregation-of -sources"  tax  reform,  con- 
cerning the  aptitude  which  is  created  by  the  existence  of  the  state  or 
unitary  tax  upon  public  utility  corporations  in  Michigan  for  the  "segre- 
gation" of  these  taxes  to  the  support  exclusively  of  the  state  govern- 
ment in  this  commonwealth.  The  close  equivalency  in  amounts  between 
the  collections  of  specific  taxes  by  the  state  each  year  and  its  disburse- 
ments for  state  purposes  has  inspired  not  a  few  suggestions  that  a 
separation  of  "sources"  should  be  adopted  in  Michigan.  Attorney  Gen- 

*17See  account  of  efforts   in  this  direction  : 

Judge   Goodwin's   Memorial    from   the   City   of   Detroit   to  the   Constitutional   Conven- 
tion.     Convention   Jour.,   p.   689  and   769. 

Report  of   Legislative  Com.   of   1875.      House  Jour.   1875,    Vol.   2,  p.   991. 
Petition  and  arguments  from  Common  Council  of  Detroit.     House  Jour.  1891,  p.  3591. 
*18Gov.   Rich's  Message.      Sen.   Jour.    1897,   p.   22. 
*19Aud.   Report  1892,  p.   49. 
*20Aud.   Report   1902^  p. 

NOTE. — The  school  interest  fund  since  the  adoption  of  the  ad  valorem  railroad  tax  receives 
contributions  to  the  amount  of  90  per  cent  from  the  railroads.  The  remainder  is  con- 
tributed by  express  companies,  telephone  or  telegraph  and  insurance  companies.  None  of 
these  being  local  in  the  nature  of  their  expenses  or  support  it  is  not  unreasonable  to  group 
them  with  railroads. 


RAILROAD    TAXATION    IN   MICHIGAN.  63 

eral  Oren  in  particular  urged  this  plan  upon  the  board  of  equalization 
in  1901,*21  and  again  upon  the  legislature  in  the  same  year,*22  and 
Auditor  Stone  commended  the  separation  of  sources  in  his  report  of 
1892  when  urging  the  use  of  the  specific  taxes  for  the  support  of  the 
state."*23 

The  reform  may  be  said  to  have  had,  however,  but  few  advocates  in 
Michigan.  In  the  recent  constitutional  convention  (1907-8)  "segregation 
of  sources''  was  at  no  time  advocated  throughout  the  entire  session.  Not 
to  speak  further  of  the  excessive  sensitiveness  of  "the  people  of  the  state 
to  legislative  interference  with  the  school  fund — and  interference  would 
be  necessary,  naturally,  before  the  plan  of  using  railroad  and  specific 
taxes  for  state  purposes  could  be  changed — the  state  has  gone  far  in  the 
direction  of  the  centralized  administration  of  taxation  through  a  state 
board  of  taxation,  and  reform  may  seemingly  be  more  hopefully  expected 
through  strengthening  this  board  than  through  a  larger  decentraliza- 
tion of  the  system. 


II.     CENTRALIZED  ADMINISTRATION. 

The  characteristic,  which  has  been  most  distinctive  in  the  taxation  of 
railroads  in  Michigan,  has  been  unquestionably  the  persistence  of  central- 
ized administration.  The  taxing  of  the  roads  and  the  collection  and 
distribution  of  the  proceeds  has  rested  wholly  with  state  officials  in  this 
commonwealth  from  the  beginning — local  taxation  of  these  properties 
having  never  at  any  time  obtained.*25  The  plan  of  administering  rail- 
road taxation  by  central  authority  commands  approval  everywhere  and 
is  one  which  nearly  all  the  states  have  striven  to  acquire.  Its  merits 
may  be  briefly  summarized  as  follows, — an  economical  and  efficient  ad- 
ministration of  the  tax,  uniformity  in  the  treatment  of  the  roads  and 
the  establishment  of  a  taxing  authority  which  is  co-extensive  with  the 
business  activities  of  the  taxable. 

The  adoption  of  this  excellent  method  in  Michigan,  as  has  been  shown, 
was  the  accidental  outcome  of  the  ownership  of  the  original  roads  by 
the  state  and  its  permanent  establishment  resulted  not  only  from  an 
appreciation  of  its  intrinsic  worthiness,  but,  also,  through  the  identifica- 
tion of  these  taxes  with  the  specific  taxes  and  through  the  use  of  their 
proceeds  by  the  schools.  The  plan  has  received  the  unvarying  approval 
of  railroad  commissioners,  governors  and  other  public  officials  interested 
in  its  administration  and  indeed  its  practical  merits  have  fully  equaled 
the  expectations  which  the  student  in  administrative  theory  might  have 
formed.  ''There  would  be  no  advantage  but  perhaps  detriment;"  says 
Commissioner  Innis  (1883)  "from  a  change  in  the  method  of  taxing  our 
railroads,  a  conclusion  which  the  last  legislature  seems  to  have  reached, 
as,  after  an  exhaustive  consideration  of  the  subject,  a  bill  providing  for 
the  substitution  of  local  taxation  in  lieu  of  specific"  (unitary)  "it  was 
defeated  by  a  decided  vote."*26  And  from  Commissioner  Rich  in  1889, 

*21See  Rep.   of  Board  of  Equalization  1891,  p.   265. 
*22House   Jour.    1901,   p.    641. 
*23Aud.   Rep.   1892.  p.   49. 

*25Michigan    shares    with    Pennsylvania,    apparently,    the    distinction    of    being    the    only 
states  within  the  union  in  which  the  local  taxation  of  railroads  obtained  no  foothold. 
*2«R.    R.   Com.   Rep.   1882,  p.   32. 


64  MICHIGAN   STATE   LIBRARY. 

"Our  plan  for  the  taxation  of  railroad  property  has  provoked  ex- 
tended discussion  in  recent  legislatures,  and  the  constituencies  of 
the  large  cities,  as  a  rule,  favor  the  adoption  of  local  taxation — it 
is  not  probable,  however,  that  the  change  from  specific"  (unitary) 
"taxation  would  give  general  satisfaction  among  the  communities 
of  the  state."*27 

In  addition  to  the  general  benefits  which  have  just  been  mentioned, 
the  taxing  of  railroads  by  central  authority  in  this  state  has  favored 
experimentation  in  the  search  for  an  ideal  system  for  collecting  a  revenue 
from  these  properties.  The  commonwealth  has  had  a  free  hand  in  vary- 
ing its  methods  of  railroad  taxation  which  it  would  not  have  enjoyed 
had  the  interests  of  the  localities  been  involved.  "The  fear  of  antagoniz- 
ing local  interests  has  inclined  legislatures  to  permit  taxing  districts 
to  continue  the  taxation  of  railroads,"  says  the  Wisconsin  tax  commis- 
sion of  1905,  "and  the  opposition  to  surrendering  local  power  as  well 
as  the  sources  of  local  power  defeats  rational  and  scientific  laws  for 
the  taxation  of  local  property.*28  The  commonwealth  has  utilized  three 
entirely  distinct  methods  in  collecting  a  revenue  from  railroads  and  in 
none  of  these  has  serious  hindrance  to  a  full  test  of  merits  been  felt 
through  opposition  from  the  localities. 

A  second  benefit  which  has  resulted  from  centralized  administration  in 
Michigan  has  been  the  avoidance  of  the  multiple  taxation  of  roads  which 
is  so  common  even  among  those  states  which  are  richest  in  these  utilities. 
It  is,  of  course,  easily  conceivable  that  the  levying  of  one  tax  upon  the 
franchises  of  a  road  and  another  upon  its  physical  property,  and  still 
another  upon  its  income  may  be  so  administered — at  least  when  by  a 
single  authority — as  to  present  an  unexceptional  impost  and  systems  of 
this  sort  at  any  rate  are  to  be  found  in  several  of  the  states  though  the 
conclusion  seems  unavoidable  that  in  the  rapidly  changing  economic 
conditions  of  the  times  such  multiple  taxes  must  prove  awkward  of  ad- 
justment when  changed  circumstances  demand  changed  taxes. 

The  persistence  of  centralized  administration  in  this  state  did  much 
to  familiarize  people  with  the  treatment  of  railroads  as  wholes  in  the 
matter  of  taxation,  and  in  this  way  the  adoption  of  the  unitary  method 
of  assessing  these  properties  was  facilitated,  when,  as  the  result  of  the 
"equal  taxation"  reform,  the  employment  of  the  property  tax  was  rendered 
desirable.  The  keynote  to  this  now  widely  used  administrative  detail  is 
the  insistance  that  railroads  shall  be  assessed  as  going  concerns  and  that 
they  are  productive  entities — therefore  valuable — only  as  the  property 
as  a  whole  is  taken  together.  The  avoidance  of  the  evils  which  result 
from  apportioning  the  roads  out  to  the  localities  for  assessment  and 
also  those  which  result  from  omitting  some  railroad  element — usually 
"good  will"  or  "corporate  excess" — from  the  assessment  is  accomplished 
by  means  of  this  unitary  method. 

Finally  the  general  acceptableness  throughout  the  state  of  the  valua- 
tion which  was  determined  by  the  "great  appraisal"  and  which  was 
obtained  by  recognizing  all  the  elements  which  enter  into  a  railroad 
property  sustains  the  assertion  of  popular  familiarity  in  Michigan  with 
the  notion  of  dealing  with  railroads  as  wholes. 


*27R.    R.    Com.    Rep.    1889,    p.    42. 
*28Rep.   of  Wis.  Tax  Com.,   1903,  p.   151. 


RAILROAD    TAXATION    IN   MICHIGAN.  65 

III.     MERITS  OF  THE  PROPERTY  TAX  ox  RAILROADS. 

The  changefulness  of  systems  of  taxation  in  Michigan  is  in  marked 
contrast  with  the  permanency  of  the  scheme  of  administration  which 
has  just  been  described — the  ^capitalization  tax  giving  way  to  the  one 
on  incomes  and  this  in  turn  being  supplanted  by  the  property  tax.  It 
exceeds  the  possibilities  of  demonstration  doubtless — owing  largely  to 
differences  in  conditions  and  in  taxing  ideals — to  show  that  there  has 
been  a  uniform  progression  of  merit  in  this  succession  of  methods,  but 
the  property  tax  shows  points  of  superiority  over  its  predecessors  which 
are  worthy  of  consideration  at  this  place. 

The  most  obvious  benefit  which  has  resulted  from  the  adoption 
by  the  state  of  the  property  tax  upon  railroads  is  the  simplifica- 
tion of  the  taxation  process  throughout  the  commonwealth.  All  the 
principal  taxables  throughout  the  state  are  now  subject  to  the  property 
tax  principle.  Such  an  uniformity  of  methods  in  collecting  its  revenues 
must  certainly  profit  a  commonwealth  when,  as  the  result  of  a  new 
economic  order — say  the  supplanting  of  an  agricultural  economy  by 
manufacturing — or  'as  the  result  of  new  governmental  burdens,  it  be- 
comes necessary  to  readjust  its  fiscal  arrangements. 

Readjustments  of  this  sort  have  occurred  periodically  in  Michigan — 
once  in  1881,  when  a  tax  commission  was  appointed  to  revise  the  state 
tax  laws,*29  again  in  1891  when  a  mortgage  tax  law  was  adopted,*30 
a  new  method  of  collecting  taxes  was  devised,*31  the  tax  on  mines  was 
made  a  local  tax*32  and  a  new  railroad  tax  was  enacted,*33  and  finally 
the  one  of  1896-1901  when  the  reform  legislation  was  adopted — and  the 
recurrence  of  tax  commission  after  tax  commission  in  other  states  sug- 
gests that  with  them  the  case  is  not  different.  In  such  periods  of  popular 
discontent  with  tax  conditions  the  well  known  and  simple  system  of 
taxation  must  be  vastly  easier  of  adjustment  than  is  a  system  composed 
of  various  taxes.  The  expensive  appraisal  of  the  Michigan  railroads — 
the  "great  appraisal" — is  illustrative  of  the  money  cost  which  must  some- 
times be  borne  by  a  people  in  reducing  their  different  taxes  to  an  equiva- 
lent basis. 

The  equality  in  taxation  which  is  so  commonly  regarded  as  the  Alpha 
and  Omega  of  justice  in  this  process  finds,  too,  its  most  popular  measure 
in  the  use  of  "uniformity"  in  rates,  methods  and  bases  for  all  taxables. 
The  reform  movement  in  Michigan  w^hich  rallied  under  this  watchword 
of  "equality"  might  apparently  with  equal  propriety  have  adopted  the 
phrase  "uniformity  of  taxation"  as  its  slogan.  "I  have  always  con- 
tended," said  Governor  Pingree  in  his  ex-augural  message,  when  reply- 
ing to  the  assertion  that  equal  taxation  was  obtainable  through  increas- 
ing the  specific  rates  on  railroads,  "that  whether  they"  (the  railroads) 
"were  paying  their  share  or  not,  the  property  of  these  companies  should 
be  taxed  the  same  as  other  property  is  taxed,  namely,  upon  an  assess- 
ment at  its  cash  value."*34  The  eventual  substitution  of  the  property 
tax  for  the  specific  railroad  tax — as  an  alternative  to  the  plan  of  pro- 
curing equal  taxation  through  raising  the  specific  rates — is  the  well 

*29Report    of   this    Com.    House    Jour.    1882,    n.    28. 

•soLaws  1891,   Act   200. 

*31Laws  1891,   p.    292. 

*S2State  Laws  1891,  Act  139. 

*33State  Laws  1891.  Act  174. 

*34House  Jour.   1901,  p.   24. 


66  MICHIGAN   STATE  LIBRARY. 

known  sanction  with  which  the  people  of  the  state  endorsed  the  govern- 
or's contention. 

The  history  of  these  two  taxes  (specific  and  property)  in  this  state 
warrants  indeed  the  conclusion  that  a  strong  popular  dislike  prevails 
with  regard  to  exceptional  taxes  since  the  early  declaration  from  Justice 
Campbell  that  "the  property  tax  must  be  the  rule,  specific  taxes  the  ex- 
ception," has  been  amply  justified  by  the  course  of  development.  The 
absorption  into  the  general  property  system  of  one  after  another  of  the 
specific  taxes,  which  was  noticed  on  an  earlier  page,  seems  to  presage 
the  ultimate  mastery  of  the  field  by  the  property  type  of  impost.  This 
outcome  is  the  result,  too,  not  only  of  the  favor  with  which  the  property 
tax  is  popularly  regarded,  but  also  of  the  dislike  which  is  commonly 
felt  for  the  extraordinary  in  government.  The  special  charters,  for 
example  were  avowedly  confiscated  by  the  state  on  account  of  the  special 
privileges  which  they  conferred,  and  the  imputation  of  special  privilege 
stirred  much  of  the  feeling  which  was  eventually  directed  against  the 
specific  system  of  taxing  railroads. 

Nothing  is  more  demonstrable,  certainly,  than  the  fallaciousness  of 
the  claim  that  uniformity  in  taxation  gives  equality — at  least  the  "equal- 
ity" which  is  measured  by  the  "residum  of  property,"  or  other  familiar 
tests  which  are  so  well  known  to  the  student  of  taxation.  The 
principle  is  well  established,  also,  in  the  conclusions  of  our  courts  that, 
even,  when  equality  is  a  matter  of  constitutional  requirement,  it  does  not 
imply  uniformity  in  method.  But  taxation  subtleties  were  little  dealt 
with  by  the  "equal  taxation"  reformer,  and  it  was  broadly  assumed  that 
equality  in  results  would  follow  from  similarity  in  methods.  No  other 
tax  carries  such  prestige  with  the  American  public  as  that  of  the  tax 
on  property,  and,  to  the  extent  that  public  sympathy  must  be  lured  and 
won  in  order  to  make  an  impost  successful,  no  other  tax  may  be  so  profit- 
ably employed  as  the  one  which  taxes  property.  The  approval  of  public 
opinion  is  a  support  which  in  fact  no  tax  may  enduringly  disregard. 
Even  "an  unfounded  belief,"  Bastable  declares,  "that  the  public  burdens 
are  not  fairly  divided  among  the  different  classes  and  individual  mem- 
bers of  a  society,  is  a  seriously  disturbing  force."*35  The  complacency 
of  the  taxpayer  seems  cheaply  purchased,  then,  when  procured  at  the 
price  of  establishing  an  uniform  system  of  taxation  even  though  the  ex- 
tension of  the  unscientific  general  property  tax  is  necessitated  by  the 
achievement. 

The  comparative  openness  which  marks  the  administration  of  the  new 
tax  is  also  a  merit  which  deserves  thorough  approval.  The  annual  tax- 
ing of  the  railroads  by  a  board  of  assessors  is  almost  necessarily  a  con- 
spicuous occurrence,  and,  while  all  have  not  risen  to  the  importance  of 
an  "event"  in  Michigan  as  did  the  one  in  1905,  when  the  Galbraith  law 
was  involved,  yet  no  execution  of  this  duty  by  the  board  has  gone  un- 
noticed by  the  press  of  the  state,  In  one  case  this  open  or  public  method 
of  administering  the  tax  gave  a  school  board,  in  another  the  attorney 
general,  the  opportunity  of  rectifying  the  levy  in  the  interests  of  equity. 
Useless  as  publicity  may  be  in  the  case  of  some  taxes,  if,  indeed,  not 
positively  harmful,  its  serviceableness  admits  of  little  questioning  when 
revenue  is  to  be  secured  from  two  properties  concerning  which  there  is 
so  much  enduring  jealousy  as  between  railroad  and  general  property. 

*35P.   275   Pub.    Finance. 


RAILROAD    TAXATION    IN   MICHIGAN.  67 

A  closely  allied  merit  to  the  one  which  has  just  been  described,  is  the 
assignment  to  the  new  tax  of  a  specialized  board  by  which  it  was  to 
be  administered.  Nothing  is  at  first  more  mystifying  to  the  student  than 
the  seeming  indifference  and  real  hesitancy  of  successive  legislatures 
toward  increasing  the  tax  on  gross  incomes  while  other  taxables  were 
so  evidently  bearing  increasing  burdens.  The  explanation  seems  obvious 
that  there  was  a  lack  of  responsible  initiative  with  regard  to  railroad 
taxation  in  a  body  so  numerous  as  is  a  state  legislature.  Railroad  taxa- 
tion was  the  especial  business  of  no  one  in  a  body  of  this  sort  and  there- 
fore received  no  especial  attention  until  abuses  became  so  manifest  that 
they  could  no  longer  be  ignored.  The  new  tax  on  the  other  hand  is  repre- 
sented before  the  public  by  this  specialized  board,  and,  besides  benefiting 
the  administration  of  the  tax  with  the  usual  advantages  which  flow  from 
specialized  treatment,  a  public  standing  is  given  to  the  exaction  in  keep- 
ing with  its  importance  through  thus  being  intrusted  to  a  special  branch 
of  government  for  administration.  The  determinate,  educational  in- 
fluence which  this  board  exercises  is  indeed  of  no  small  moment  as  the 
single  instance  of  the  work  performed  by  the  board  reports  may  show. 

These  transcripts  of  the  data  from  which  the  tax  is  determined — mere 
by-products  from  the  activities  of  the  board — together  with  studies  into 
the  conditions  which  affect  this  data  are  published  biennially  and  sup- 
plant admirably  the  services  of  the  well  known  reports  from  the  periodic 
tax  commissions  which  the  necessities  of  tax  reform  compel  other  states 
to  provide.  It  is  in  fact  a  belief  easily  credible  that  the  continued  pre- 
sentation of  such  information  as  is  found  in  these  reports  should  so 
inform  the  public  mind  and  adapt  it  to  the  development  of  proper 
methods  of  taxation  as  to  forestall  permanently  the  recurrence  of  the 
turmoil  and  expense  of  another  "equal  taxation"  struggle. 

The  new  tax  and  its  accessories,  the  ad  valorem  assessment  processes 
and  boards  of  assessors,  commands  approval  also  through  harmonizing 
with  the  railroad  taxing  systems  of  other  states.  Most  of  the  American 
states  use  a  method  similar  to  the  one  which  has  been  adopted  by  Michi- 
gan and  there  are  incontestable  benefits  to  be  derived  from  uniformity 
among  all  the  states.  The  roads — now  largely  interstate  lines — benefit 
through  being  obliged  to  familiarize  themselves  with  but  one  system  of 
taxation  and  through  being  freed  from  the  temptation  of  playing  off 
states  levying  on  earnings  against  states  collecting  from  property,  as- 
signing to  the  first  their  property,  to  the  second  their  earnings.  Michi- 
gan is  benefited  by  having  an  easily  applied  test  of  the  justness  of  her 
own  impositions  upon  railroads  by  simply  comparing  them  with  the 
levies  made  upon  the  same  roads  by  identical  methods  in  other  states. 
Few,  indeed,  are  the  illustrations,  which  are  more  forcible,  by  which  the 
contentions  of  those  publicists,  who  believe  in  a  stronger  informal  union 
among  the  states,  are  supported  than  are  those  which  show  the  benefits 
derivable  from  the  uniform  taxation  of  railroads. 

But  it  is  the  tax  itself,  or,  more  familiarly  "rate"  which  bids  fair  to 
be  the  most  enduring  product  of  the  taxation  reform.  The  nurturing 
of  the  idea — mainly  through  the  supreme  court  decisions — that  the  ele- 
ments which  enter  into  the  "average  tax"  or  rate  must  be  real  elements 
and  not  as  the  state  board  of  assessors  contended,  a  mixture  of  real  and 
"equalized"  ones  has  done  much  to  give  body  to  the  impost  and  to  estab- 
lish it  with  the. public.  The  action  of  the  board  received,  indeed,  no 


68  MICHIGAN    STATE  LIBRARY. 

uncertain  condemnation  from  the  public  when,  in  trying  to  apply  the 
Galbraith  law,  a  tax  was  levied  upon  the  railroads  which  was  different 
from  the  average  of  taxes  levied  upon  general  property.  An  "average 
rate"  savors  of  impartiality  to  the  public  through  being  the  average  of 
all  the  taxes  levied  throughout  the  state.  The  many  and  divergent 
sources  from  which  its  components  are  collected — levy  ings  of  hun- 
dreds of  local  officials  upon  locally  made  assessments,  and  imposi- 
tions from  legislatures  and  county  and  city  boards — removes  apparently 
all  taint  of  biased  or  improper  influences  from  its  make  up. 

The  use  in  Michigan  of  an  apportioned  general  property  tax  instead 
of  the  rated  one  so  customarily  employed  in  other  commonwealths,  de- 
velops superlative  material  for  an  average  rate  or  tax.  The  apportion- 
ment of  the  public  burdens  as  compared  with  rating  them  is  a  more  di 
rect  way  of  measuring  the  burden  levied  against  the  contributing  prop- 
erty and  seems  commendable  of  itself.  But  the  debt,  however,  of  the 
Michigan  railroad  impost  to  the  apportionment  scheme  is  for  the  thou- 
sands of  judgments  both  as  to  tax  burdens  and  tax  bases  which  a  system 
of  apportioned  school,  township,  county,  village,  city  and  state  taxes 
must  involve.  These  judgments  reflect  the  data  from  which  the  "average 
tax"  is  composed  and  the  sense  of  arbitrariness  so  easily  associated  with 
rated  taxes  or  their  derivatives  seems  foreign  to  a  tax  like  this.  The  im- 
post fluectuates  directly  with  the  increases  or  decreases  of  taxation  upon 
other  property.  The  farmer  and  the  merchant  finds  that  when  the  annual 
levy  is  heavy  upon  him  it  is  heavy  upon  the  railroad  also  and  this  smacks 
of  the  "equality"  which  was  so  largely  the  inspiration  of  the  tax  reform. 


RAILROAD    TAXATION    IN  '  MICHIGAN.'  '  69 


BIBLIOGRAPHY. 

Adams,  H.  C.,  Public  Finance. 

Clapper-ton,  Geo.,  Taxation  of  Corporations,  U.  S.  Industrial  Commis- 
sion, Vol.  IX. 

Commercial  Valuation  of  Railway  Operating  Property  in  the  United 
States,  1904.  Census  Bulletin  21,  1905. 

Cooler,  History  of  Michigan,  "Commonwealth  Series." 

Detroit  Free  Press,  issues  of  the  same  date  with  legislative  sessions. 

Friedman,  H.  G.,  The  Taxation  of  Corporations  in  Massachusetts,  Colum- 
bia Univ.  Pub.,  Vol.  XXVII. 

Keith,  Miss,  An  Historical  Sketch  of  Internal  Improvements  in  Michi- 
gan. Mich.  Pol.  Sci.  Pub.,  Vol.  IV. 

Laws  of  Michigan,  1846,  1855,  1873,  1891,  1897,  1899,  1901  and  1905. 

McRea,  R.  C.,  Taxation  of  Transportation  Companies,  Report  of  the  U. 
S.  Industrial  Commission,  Vol.  IX. 

Messages  of  the  Governors  (Michigan),  Vols.  3,  4  and  5. 

Michigan  Constitutional  Convention,  1850,  Debates  of. 

Michigan  Constitutional  Convention,  1867,  Debates  of. 

Michigan  House  Journal,  1897,  Spe.  Sess.,  1898,  1899,  1901. 

Michigan  Joint  Documents,  1840-1873.  These  contain  the  State  Audit- 
ors' and  Treasurers'  Reports  and  Governors'  Messages. 

Michigan  House  and  Senate  Doc.,  1836-1860. 

Michigan  Manuals,  1890-1910. 

Michigan  Statutes,  1836-1909. 

Michigan  Supreme  Court  Reports. 

Records  and  Briefs  ''Michigan  Tax  Cases,"  Vols.  46,  50  and  51. 

Reports  of  Michigan  Tax  Commission,  1900,  1902,  1903-4,  1905-6  and 
1907-8. 

Report  of  Michigan  State  Auditor,  1873.  This  report  presents  a  financial 
history  of  Michigan  from  the  beginning  of  the  state  government, 
compiled  by  Auditor  Humphrey. 

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Report  of  the  Ontario  Tax  Commission,  1905. 

Reports  of  the  Michigan  Railroad  Commissioners,  1873-1903. 

Schaffner,  Miss,  Terr.  Tax  Legislation  in  Michigan.    Mich.  Pol.  Sci.  Pub 
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Seligman,  E.  R.  A.,  Essays  on  Taxation. 

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State  Taxation  of  Railways  and  other  Transportation  Agencies.  Inter- 
state Com.  Com.  Rep.,  Part  V,  1902. 

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INDEX. 

Assessors,  State  Board  of,  39;  merged  with  Tax  Commission,  44;  character  of  membership. .  48 

Assessments,  in  Michigan,  of  general  property,  51,  52;  of  railroads 45-49 

Atkinson  Tax  Bill,  proposed 36 

Centralized  Tax  Administration,  beginnings  in  Michigan,  15;  nature  of 63-65 

Charter  Roads,  origin  of,  9-10;  action  of,  14-17;  tax  receipts  from,  18-19;  objectionableness 

of,  20,  38;  repeal  of 11-12 

Detroit  School  Board  Case,  influence  of 51 

"Division  of  Yield"  Taxation  Principle,  use  of  in  Michigan 60-62 

"Equalization"  Question,  importance  of,  43;  difficulties  of 50-53 

Equalization,  State  Board  of,  establishment  of,  12;  report  on  panic  of  "93" 34 

' 'Equal  Taxation"  Reform  Causes,  33-35;  results 35-39 

Express  companies  subject  to  the  property  tax 56 

Franchises,  taxation  of 40-41 

Galbraith  Law,  enactment  of 52 

Gross  Income,  definition  of 23-24 

Internal  Improvements,  account  of 9-10 

Interstate  Commerce,  opposition  to,  17;  taxation  of 25 

' '  Land  Grant "  Bounties,  importance  of 10 

Localization  Problems,  as  between  active  and  collateral  railroad  property,  23;  interstate 

commerce. 17,  25,  39 

Lord  Bill,  nature  of 53 

Merriman  Law,  adoption  of 37 

"Michigan  Appraisal"  of  Railroads,  reasons  for,  39;  influence  upon  railroad  assessments, 

40,  47;  influence  upon  equalization,  50;  comparison  of,  with  assessments 49 

Michigan  Central  Railroad,  charter  provisions,  13;  full  capitalization  of 19 

Multiple  Taxation  of  Railroads,  avoidance  of  in  Michigan 64 

Municipal  "Aid",  stimulus  of  to  road  building,  10;  character  of. 21,  22 

Panics  of  1837,  9;  of  1893 .' . .  / 34 

Pingree,  Governor,  taxation  message,  35;  message  on  school  fund,  57;  taxation  reform  leader, 

39;  ex-augural  message,  on  equal  taxation 65 

Primary  School  Fund,  relation  to  specific  taxes,  13;  origin  of,  57;  relations  to  tax  reform, 

57-58;  to  railroad  taxation,  59;  criticisms  of 59 

Rate  of  Taxation,  upon  general  property,  12;  as  between  charter  roads  and  general  property, 

18-19;  as  between  gross  income  taxed  roads  and  general  property 33 

Railroad  Assessments,  legal  requirements,  40-41;  method  of,  45-48;  history  of 48-49 

Reports  from  Railroads,  under  the  capitalization  tax,  17-18;  under  the  gross  income  tax, 

30-32;  under  the  property  tax 41,  46 

Segregation  of  Sources,  inadequacy  of,  to  solve  equalization  problem  of  railroad  taxation, 

53 ;  status  of,  in  Michigan 62 

"Situs"  Problems  in  Railroad  Taxation,  significance  of,  42;  as  to  benefits  and  responsibilities, 

59;  as  a  basis  of  "yield"  apportionment 61 

Specific  State  Taxes,  character  of,  12-13;  opposition  to,  65-66;  to  support  the  state  govern- 
ment    62 

Tax  Commissions,  commission  of  1881,  65;  mandatory  tax  commission  of  1899 37,  50-51 

Tax  Rates,  under  the  capitalization  tax  system,  14;  gross  income  tax  rate,  26-30;  the  "average 

rate,"  41-43 50-53,  66-68 

Tax  Readjustments  in  Michigan,  dates  of 65 

Tax  Reviews,  provisions  for,  41 ;  results  of  first 46-47 

Tax  Statistician,  appointment  and  duties  of 34 

Telegraph  and  Telephone  Companies,  subject  to  the  property  tax 56 

"Uniformity"  in  Taxation,  demand  for,  35;  "uniformity"  and  "equality"  of  taxation, 

65-66;  between  states 67 


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